Raising the Debt Ceiling is Inevitable

July 18th, 2011 at 12:32 pm | 32 Comments |

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It fair to say that most people do not understand the intricacies and machinations of the “debt ceiling” debate underway in the U.S., involving the President, Congress, Republicans Democrats, with the rest of the world looking on.

What can be guaranteed is that the ceiling will be raised from its present horrendous $14.3 trillion – that’s 14.3 plus 11 zeros (00.000,000,000).

The alternative would be the U.S. defaulting on its debts, losing its Triple A credit rating, unable to pay the seniors their benefits, or the military and creditors beyond Aug. 2.

Basically, the Republicans – led by the rash of new Tea Party Representatives elected last November – want draconian cuts in government spending coordinated with raising the debt ceiling.

President Barack Obama wants the debt ceiling raised, along with select spending cuts and tax increases.

So far, it’s tax increases that Tea Party Republicans and others dislike.

Obama and Democrats feel if spending cuts are in order, taxes must be raised to bridge the gap. That strikes many Republicans as self-defeating.

One aspect missing from Obama’s figuring is that if the debt ceiling is raised, and more tax money is available, spending will increase — not diminish. That’s just the way it is with governments—all governments.

The more money that’s available, the more they spend.

Obama (and Congress) may agree on some cuts, but if taxes are raised along with raising the debt ceiling, government spending will inevitably increase  in other  areas.

Government rarely cuts programs once they’ve been started.

We members of the public know this. It is part of the reason why stock market investors are not yet panicking over the gloom and doom being dispensed by Republicans and Democrats — and certainly  by this very strange American president who seems in over his head.

Obama makes declarations of intent without actually doing much.

One of the intangibles necessary for America’s financial recovery is the confidence felt by the American people. Without confidence, the unemployment rate will rise, businesses will stagnant, fear will become endemic. Entrepreneurs run for cover.

It hasn’t reached that stage yet – witness the stock market which still seems to rally and thrive. Right now the hedge is gold – soon to top $1,600 and ounce, and a fair bet to hit $2,000 the way America is groping.

Greece can flounder and default without Americans seeing themselves in a similar situation. But if Italy, Spain, Portugal go down the tube, the picture changes.

A sure way to undermine middle America’s already fragile confidence is to raise taxes. Canadians feel the U.S. taxes are reasonable (compared to their own), but Americans feel they are already taxed to the hilt. They aren’t, but that’s irrelevant if they think they are.

Where Americans have a good understanding of their government, is that more taxes mean more government spending. Common sense dictates that it’s a false hope to think you can spend your way out of economic malaise.

Anyway, it’s all academic. The debt ceiling will eventually be raised and an accommodation will be reached. The Republicans are probably more right than wrong, but in the national interest they will compromise.

But if they compromise too much, woe betide them in the 2012 election.

Recent Posts by Peter Worthington



32 Comments so far ↓

  • corwin613

    Well, we’re really not talking about raising middle America’s taxes. We’re talking about eliminating corporate subsidies, loopholes, and deductions for those at the top. And a very important reason for doing so is to make sure that those at the top are invested in the whole US economy.

    Right now, that’s not happening, and republicans are doing everything in their power to prevent it. Instead, those at the top seem to be do better when those of us in the middle and working classes do worse. That is not how it is supposed to be.

  • zephae

    Common sense dictates that it’s a false hope to think you can spend your way out of economic malaise.

    Defend this statement, because it strikes me the same way, logically, as saying “it is impossible for a restaurant to make money because they have to spend so much upfront and make it back slowly.” in the same way, spending money on mass transit and trasportation infrastructure, R&D, and education have high up-front costs but can provide great dividends leading to greater revenue to both re-invest and pay down debts. You need to be careful in where you put the money, but I can see no “common sense” reason, as in one that is logically and conceptually sound, that creating demand in any form is a hopeless endeavor.

  • adamcarralejo

    I love the idea of referencing “common sense” to support an assertion of fact. I wish I could’ve done this in college … all my endnotes would be to Common Sense, with my phone number in the parentheses.

    I’m guessing, when Mr. Worthington says “common sense” he really means “fringe right-wing economists” … but you know, we’ll never know until he puts on puts on his big boy pants and explains himself.

  • adamcarralejo

    “Where Americans have a good understanding of their government, is that more taxes mean more government spending”

    It doesn’t have to be that way. The President and Congress could, for example, negotiate a deal whereby spending cuts are coupled with a tax increase (lets say on a 3:1 ratio?) … if only that were on the table. Mr. Worthington, can you check out the news over the past couple weeks and let me know if anyone if offering anything like that?

  • jnail

    Why are facts so hard for the R’s? Closing loopholes, “Tax spending” is not raising 99% of American’s paid taxes.

    If you simply tell people the truth they can understand what is going on, ie the R’s do not care about them or the nation.

    That is why the truth is always obfuscated.

  • Xunzi Washington

    “Where Americans have a good understanding of their government, is that more taxes mean more government spending.”

    Depends on how fast and loose you play the word “spending”. If you have a deficit of 100 dollars and your revenues is 40 dollars, well if you cut outlays by 40 dollars and raise taxes to bring in 20 more dollars, you’d wipe out your deficit.

    Of course, you’d have the “spend” the 20 dollar revenue increase on the programs you are currently running (at a cost now off 60 dollars).

    If that kind of “spending” is part of the meaning of “more taxes mean more government spending” well then I’d agree with you. You can always count on government to spend your taxes.

    But if that’s what you mean, then you are either being childishly simplistic on purpose (which means your columns are not worth reading owning to your intention to be disingenuous) or not on purpose (which means your columns are not worth reading because you are economically retarded and in need of help).

    Either way, doesn’t look too good for you as the author.

  • sweatyb

    If only there were some kind of legislation Congress could use to make clear its spending priorities. But unfortunately, the Constitution only allows the House of Representatives control over the debt ceiling and nothing else.

    It’s perfectly reasonable for them to complain about government spending since they have absolutely no input in the creation of the plans for that spending.

    Common sense dictates that since our government is in the enviable position of having stellar credit it’s essential that we ruin that credit to prevent further borrowing.

    It’s clear to even a mentally challenged child that government is a vast black hole where money goes to die (With the obvious exception for printing money which will generate catastrophic inflation.) Only rich people can afford to employ all the lazy, drug-addicted liberals. So we should make sure to cut taxes on the richest. Otherwise all the Democrats will come crawling to the federal government for handouts.

    Even wild animals in the Amazon are aware that government spending is enormously wasteful. What with all the union labor and everything. Except for money spent on wars and on subsidies to private industry (Wild animals are especially keen on money paid to private companies to fight our wars!)

    The very molecules of the air we breath vibrate with the knowledge that the only way to address high unemployment and low consumer demand is to slash government spending in the very areas that are most needed during a downturn.

    • valkayec

      Okay, you’ve confused me.

      The Constitution states the House has the sole responsibility to spend money, allocated tax dollars, and raise tax monies. In other words, all fiscal responsibility lies within the House. Any spending or taxation must come from the House. If the House is irresponsible in not maintaining it’s checking account and overspends, the the Treasury is obligated to borrow the additional monies necessary to pay the bills the House has racked up. If the House chooses to give money away through the tax code and not raise money through tax increases and continues to spend a like amount, then less revenue comes into the Treasury which means the Treasury must borrow to make up the difference between revenues (income) and expenses (outlays).

      Right now, the House is failing in its Constitutional duty to insure that outlays are met in a timely basis. In other words, they chose to spend the cash but don’t want to pay the bills they incurred. That’s fiscally irresponsible. If Congress didn’t want to borrow beyond the debt limit they had two choices: increase income through taxation and/or eliminating tax earmarks or reduce spending to the tune of 44% of fiscal outlays.

      What the House chose to do is neither. They chose to have their cake and eat it too. However, the financial world doesn’t care about the unintended consequences of spending too much. They care about getting paid on time…which is why the Treasury must borrow the need funds to pay for the spending incurred by the House, whether through the tax code or direct outlays, and approved by the Senate and President.

  • beleg

    “The more money that’s available, the more they spend.”

    This seems to be the central point of your article, everything else you say hinges on it. But you offer absolutely no justification of it. No answer to those who disagree. Which is odd, because it is, on its face, clearly untrue. Under Clinton the ratio of spending to revenue decreased.

  • armstp

    Worthington,

    After all these years economics is clearly not your strong suit.

    “One aspect missing from Obama’s figuring is that if the debt ceiling is raised, and more tax money is available, spending will increase — not diminish. That’s just the way it is with governments—all governments.

    The more money that’s available, the more they spend.

    Obama (and Congress) may agree on some cuts, but if taxes are raised along with raising the debt ceiling, government spending will inevitably increase in other areas.”

    These are bullshit generalities and conservative talking points.

    Taxes have gone up under every single U.S. President except G.W. Bush. During both the Reagan and Clinton years taxes went up and offset spending which resulted in eventually lower deficits. Clinton was able to get us through a combination of GDP growth, tax increases and spending cuts (a balanced approach) to a net budget surplus.

    You also need to get a better grasp of the numbers. Looking at whole numbers tells you nothing. It is only your way and the conservative way to fear-monger.

    A $14.3 trillion deficit has to be compared to the size of the economy to give context. At that level it is about 95% of GDP (high for sure). However, if you net out Treasuries that the government owns itself and only look at public debt or debt held by the public there is about $9 trillion of debt outstanding, which represents the more real 62% of GDP.

    The ratios are high right now because of the massive drop we have had in GDP over the last few years, as spending levels have not really increasesd that much. However, we have been at these levels before and the U.S. is about middle of the pack versus other OECD countries.

    The CBO in its baseline projections is not projecting it go up very much and could come down with GDP growth. It should be manageable going forward, as it is today.

    .

    “but Americans feel they are already taxed to the hilt. They aren’t, but that’s irrelevant if they think they are.”

    Well at least you admit that Americans are not “taxed to the hilt” as tax collection is at a 50 year low. If you read the polls, there is no evidence that Americans feel particularly “taxed to the hilt” and almost all recent polls suggest that Americans want a balanced approach to deficit and debt reduction, which would include taxes.

    “Do you think any agreement to raise the national debt ceiling should include only spending cuts, or should it also include an increase in taxes for the wealthy and corporations?”

    Spending
    cuts only Also a tax
    increase Unsure
    % % %
    ALL
    25 67 8
    Republicans
    48 43 9
    Democrats
    7 87 6
    Independents
    26 66 8

    ——————————————————————————–

    http://www.pollingreport.com/budget.htm

    19 Different Polls Show That Americans Support Tax Increases To Cut Deficit
    July 1, 2011
    By Jason Easley
    238diggsdiggShare332642

    Despite what the GOP keeps telling us, Bruce Bartlett has compiled a list of 19 different polls taken since January that demonstrate that Americans support increasing taxes in order to reduce the deficit and inequality. Americans may not love tax increases, but they understand their necessity for deficit reduction.

    In the June 9 ABC News poll 61% of Americans believe higher taxes will be necessary to reduce the deficit, and 57% of those polled said that deficit reduction should include both tax increases and spending cuts.

    A Pew poll found that more people blame the nation’s involvement in wars than tax cuts or spending for the deficit. The poll also found wide support for increasing taxes, as 67% said the more high earners income should be subject to being taxed for Social Security, and 66% support raising taxes on incomes over $250,000, and 62% support closing corporate tax loopholes.

    A Bloomberg poll taken in May found that only 33% of those surveyed thought that it would be possible to lower the deficit without raising taxes, 64% expressed the belief that it isn’t possible to lower the deficit without raising taxes.

    An April CBS News/NY Times poll showed that 72% of people favored raising taxes on the wealthy in order to reduce the deficit. A March NBC News/Wall Street Journal poll found that 81% of those surveyed would support a tax on millionaires that would be used for deficit reduction, and 68% supported eliminating the Bush tax cuts on those who make over $250,000.

    etc.

    • valkayec

      In other words, every Congress until now recognized the need to balance the books. If American voters demanded certain programs, ie. Social Security, Medicare and Medicaid, then government had to find a way to finance those programs. If government wanted to go war, it had to find a way to finance those war time expenses.

      What we have now, ever since the GW Bush admin. on the GOP side, is a complete disconnect between direct and indirect spending and the reality of current incoming revenues (and thus the necessity of borrowing).

      As someone who dealt with both sides of the ledger in accounting, what the GOP is demanding is fiscally irresponsible and hazardous. If you spend the money, either through the tax code in earmarks or direct spending, you have to pay the bills or your credit rating is shot.

      As far as I can tell there is not one GOP politico who has made the connection between falling revenues as a result of the recession and the continuing, popular expenditures. Or to put it more bluntly, federal revenues amount to 14.4% of GDP while needed revenues amount to ~24% of GDP. If Geithner and other independent economists are correct, the difference is 44% of the federal budget.

      Now think about these numbers. Imagine trying to cut 44% of the federal budget and where those budget cuts will come from. Is it even possible? Or does the House need to raise more revenues to match required expenditures? Or should there be a meeting of the minds that reduces expenditures via direct and indirect spending and raising revenues to offset the difference between costs and revenues?

  • wileedog

    “but Americans feel they are already taxed to the hilt. They aren’t, but that’s irrelevant if they think they are.”

    Well maybe if a certain party and a certain ‘news’ organization would stop screaming bloody murder about it and treating the tax code like its serfdom they wouldn’t feel that way, would they?

    And please, stop with the “if they have more money they will spend more money” tripe. Its not like the money is sitting in a big pile in the middle of the room and every time taxes are raised Biden walks in with a big basket and dumps more dollar bills into the pile.

    You want less spending? Elect some responsible adults. You can’t starve a beast that can vote itself more money any time it wants anyway. Artificial hooey like debt limits and balanced budget amendments are just a show. Ask PayGo.

  • valkayec

    This morning, Moody’s recommended that the debt ceiling be eliminated since it’s a failed relic and no longer serves a useful purpose except to allow the two parties to play political theater. According to a Reuter’s article:

    “Stepping further into the heated political debate about U.S. debt problems, Moody’s suggested the government could look at other ways to limit debt.

    It cited Chile, widely praised as Latin America’s most fiscally-sound country, as an example.

    “Elsewhere, the level of deficits is constrained by a ‘fiscal rule,’ which means the rise in debt is constrained though not technically limited,” Moody’s said, adding that such rule has been effective in Chile.

    It also cited the example of the Maastricht criteria in Europe, which determines that the ratio of government debt to GDP should not exceed 60 percent. It noted, however, that such a rule is often breached by the governments.

    In the United States, Moody’s said the debt limit had not effectively curbed the rise in government debt because lawmakers regularly raise it and because that limit is not related to the level of expenditures approved by Congress.”

    While I’m not familiar with Chile’s rules and policies that apparently have been very successful, leading Chile to be an economic leader is SA, the BPC put out it’s own version of a spending cap policy: SaveGo (save as you go). Even little Lithuania is being cited as doing the hard work, through cooperation amongst the political class and people, to get it’s fiscal house in order – and reportedly it was in much worse shape after the financial crash than the U.S.

    I don’t think it’s an automatic given that if some taxes rise or tax spending (tax earmarks) are eliminated, that spending will rise. Choosing to spend is a choice. The increased revenues could be dedicated to deficit reduction or split into a combination of deficit reduction and investments (infrastructure, education, R&D) that will increase competitiveness of the long term. Unfortunately, too many in Congress now think short term and no longer see the US as being capable of doing “big things” for the nation. They talk American exceptionalism but act like it’s all downhill from here.

    The fiscal argument is DC is more than an argument about the size & scope of the government, it’s about the visions of or for America. What the country should look like 10 or 20 years from now. I personally don’t believe that putting even more money into the hands of the wealthy, whom I define as having over a million dollars in income, will build the highways, railroads, bridges, dikes, broadband access that are needed or will doing so reduce the costs in our health care delivery system that sucks up so much of our national (federal, state, and personal) income or in doing so will enable more people to quit the security of their jobs to start their own businesses or obtain the financing they need to start or expand and hire or in doing so will increase the needed R&D investments to create more innovation and more businesses as a result of that innovation.

    Unfortunately, neither party has done a good job of laying out their visions for the country, perhaps because they’re afraid of being demonized for political gain or they’re scared of the public’s reaction. However, as Sweden and Lithuania show, when the public’s engaged in solutions oriented ideas and understands the vision, the path to solvency and growth becomes easier.

    • D Furlano

      Chile’s fiscal rule was put in place to deal with short term copper price fluctuations.

  • NRA Liberal

    I don’t know why Frum allows this inane maundering on his site.

  • Grace

    Wow, so much hackery I don’t know where to start. But this little nugget caught my eye:

    “and certainly by this very strange American president who seems in over his head.” (emphasis mine)

    Even in the middle of this fact-free talking point piece on the budget, Worthington makes room to include the obligatory insinuation that Obama is somehow foreign, alien, a ‘dark’ unknown being, who, of course, is “in over his head” in dealing with his (fairer) ‘betters’ I suppose.

    This is outright puzzling:

    “Obama makes declarations of intent without actually doing much.”

    I think OBL would beg to differ with Worthington. So would the gay service members who saw the repeal of DADT. So would the 31 million people currently uninsured who will have access to coverage when the ACA is fully in effect, but for now let’s just go with the young adults who are now able to stay on a parent’s policy instead of going without coverage. So would the auto companies and affiliated industries who would be gone by now if left to the tender mercies of the GOP.

    I can only guess that Worthington meant not actually doing much to advance the sociopathic Galtian masters’ agendas.

  • _will_

    what did people think would happen if we involved ourselves in two wars and did not adequately plan for an aging boomer population while simultaneously cutting taxes (against the advice of some fairly fiscally conservative economists I might add)?? serious question guys. any tea partiers want to weigh in?

    anyway, here’s some fun facts for those not averse to such things. facts, that is.

    60-year-low tax revenues contribute to deficit growth:
    http://economiccrisis.us/2011/04/60yearlow-tax-revenues-contribute-deficit-growth/

    history of top marginal tax rates in the US (the threshold is higher to pay the top rate is higher than it’s been since 1964, and the rates themselves are lower than they’ve been since ’91 — when GHW Bush was forced to raise taxes to fix the budget):
    http://ntu.org/tax-basics/history-of-federal-individual-1.html

    U.S. rates vs rest of world (US came in at number 37):
    http://www.nationmaster.com/graph/tax_hig_mar_tax_rat_ind_rat-highest-marginal-tax-rate-individual

    the avg multi-millionaire/ billionaire pays approx 17% in income taxes vs the avg middle class earner who pays between 25% and 33%:
    http://www.frumforum.com/how-the-super-rich-scored-on-tax-day

    many corporations exploit a variety of loopholes that allow them to pay an effective rate of 0%; and some even “pay” a NEGATIVE rate, allowing them to MAKE MONEY off of refunds on top of their net profits using your tax dollars:
    http://accounting-financial-tax.com/2011/06/12-big-yet-famous-corporations-pay-no-tax/

    Ronald Reagan raised taxes 11 times:
    http://www.forbes.com/2010/02/02/barack-obama-ronald-reagan-budget-taxes-opinions-contributors-rob-shapiro.html
    http://money.cnn.com/2010/09/08/news/economy/reagan_years_taxes/index.htm
    http://www.youtube.com/watchv=KInQbzHqQ-g&feature=player_embedded

    “The truth of the matter is that federal taxes in the United States are very low. There is no reason to believe that reducing them further will do anything to raise growth or reduce unemployment.” – Bruce Bartlett
    http://economix.blogs.nytimes.com/2011/05/31/are-taxes-in-the-u-s-high-or-low/

  • pnumi2

    “The more money that’s available, the more they spend.”

    This is one of great Orwellian deceits of our day. It is a rationalization for cutting taxes for the rich.

    In 2001 there was very little money available to spend. The Republicans not only spent what they did not have, but they cut taxes and then spent more.

    • JimBob

      You get dumber by the day boy!

      • Raskolnik

        Here’s a thought JimBob, how about instead of impugning the intelligence of those you disagree with, you answer my question from another thread that you somehow never got around to?

        JimBob,

        Let me get this straight. Your solution to catastrophic unemployment and global financial panic, stemming in large part from the collapse of venerable Wall Street firms like Lehman Bros., is to cut spending?

        1) As Xunzi asked, cut spending where, exactly? Defense, which is one of the biggest employers in the nation? The National Endowment for the Arts? NIH? NSF?

        2) To what end? How is cutting non-discretionary spending in e.g. Social Security or Medicare going to get people their jobs back? How will it fix the economy? On the discretionary side, NSF’s total budget was $6.9 billion in 2010, or less than .005% (you read that right, less than 1/20th of one tenth of one percent) of the deficit.

        I could also add a third question:

        3) Are you denying that Bush started an unfunded war on top of the war in Afghanistan? Are you denying that he was responsible for the unfunded Medicare Part D? Are you denying that his tax cuts enlarged, and continue to enlarge, the deficit?

  • MaxFischer

    if taxes are raised … government spending will inevitably increase in other areas.

    Just another republican canard. Is this what passes for intelligent thought on the right these days?

  • SteveThompson

    Since those of us that are mere mortals have difficulty actually understanding just how massive America’s $14.343 trillion debt is, here’s an article that puts the number into terms that are more understandable:

    http://viableopposition.blogspot.com/2011/07/americas-sovereign-debt-issue-putting.html

    Hasn’t Congress already eliminated the ceiling? By changing the debt ceiling to the debt floor every two years, they have pretty much accomplished their mission.

  • valkayec

    Need I add more than what has been posted above. If wars are the chosen decision, then the cost of those wars must be paid for via taxation. If tax earmarks are a chosen decision, then those earmarks must be paid for via taxation on everyone else. If social programs are desired by the public, then they must be paid for with taxation.

    There is no free lunch.

    The government is bringing in 14.4% of GDP, down from its historic average of 19%. Needed revenues to accommodate the retirement of the boomer generation is estimated at 24% of GDP. There currently is a 44% difference between federal revenues and expenditures.

    The question is where and what can be cut to eliminate that 44% difference?

    The American people will never approve of almost half of federal expenses being eliminated. The cuts would be too dramatic to defense, medicare, medicaid, and social security. The only option is a blend of sensible cuts that “do no harm” and raising revenues.

    However, I’ve yet to hear even one GOP politico state this obvious point.

  • akindependent

    “A sure way to undermine middle America’s already fragile confidence is to raise taxes.”
    Actually, a sure way to undermine middle America’s already fragile confidence is to invent a crisis by using the debt limit for leverage and hold the entire fragile economy hostage to ideology. How’s this for Republican-inspired confidence: I have pulled every dollar in all of my accounts-including my little middle-class retirement accounts-out of stocks and bonds and put everything in cash. I stopped the process of buying the house that my children and I were so excited to finally be able to afford. My colleagues and neighbors are equally afraid and equally angry. We don’t share your confidence that an infantile freshman Republican class, led by the sneering adolescent Eric Cantor, won’t gleefully drive us all over the cliff. And if they do, woe to them indeed come election time.

  • SteveT

    Hey SteveThompson, from another SteveT. That’s a useful link for those of us who prefer our dollar figures in weight; iPads and upscale hotel suites/per capita.

  • chephren

    Dear Mr. Worthington –

    I’m not sure where your byline appeared before you joined Frumforum – but could you tell us, please, if you wrote any columns (or editorials, or letters to the editor, or TV commentaries, or whatever) about the perils of raising the US debt limit on any of the seven times it was raised during the Bush administration?

    Did you comment about this on any of the 17 occasions during the Reagan administration when the debt ceiling was raised? How about the 4 times under George H.W. Bush? The eight times under Clinton?

    Except for now, has the debt ceiling ever been of concern to you during your journalistic career?

    I’m curious to know.

    You said: ” . . . if the debt ceiling is raised, and more tax money is available, spending will increase — not diminish. That’s just the way it is with governments—all governments.”

    Not quite. You forget, as all Republicans seem to have forgotten, the sensible spending limitations passed by a Democratic Congress in 1990, known as the Pay-Go rules. They required that direct spending increases (and revenue cuts) be offset by cuts elsewhere in the budget. This common sense approach (no balanced budget amendment required) enabled Bill Clinton and the Republican Congress to turn deficits into surpluses, and generate the best GDP growth since JFK and LBJ.

    Pay-Go was allowed to expire by Bush’s Republican majority in 1992. These so-called “fiscal conservatives then went crazy with pork, entitlements and unfunded war appropriations, and doubled the US national debt in only 7 years.

    So you’re wrong, not all governments are profligate. Only undisciplined, dishonest ones.