

What the Debt Ceiling Really Means - spottiness
http://www.cato.org/pub_display.php?pub_id=13339

======
scarmig
The first paragraph gives it all away:

"The clock is slowly ticking toward Aug. 2, the date on which the U.S. faces
"fiscal Armageddon" — according to the Obama administration — unless Congress
agrees to raise the debt ceiling. But would we?"

Yes, it's an Armageddon according to the Obama administration. But also
Speaker Bohner. And Senator McConnell. And Moody's. And the CBO. Etc.

It's also terribly inaccurate, even from a Cato perspective. A 44% cut in
federal spending really isn't accurately described as something that will
"almost certainly hurt." Pretending to believe that that's doable in any
sensible way doesn't lend much credence to the writer.

Even if it were possible to do things as he suggests, it wouldn't solve the
central problem. The United States has _legal obligations_ to pay Social
Security benefits, make sure our retired soldiers receive their pensions, and
other civil servants get the healthcare benefits they're entitled to as part
of their agreed upon compensation package. These aren't things you can go
"oopsies, I don't feel like paying it, maybe next month." And even if you were
to do this with extremely questionable legality, it wouldn't help the central
issue, which is faith in the credit of the United States. If I pay off my
credit card bill but have to renege on my mortgage and car payments to do so,
my credit is still going to be shot.

Lastly: this is about two weeks late in Republican messaging. It's now Obama
who's pushing for larger long-term deficit reduction and spending cuts than
Republicans (on the order of 4 trillion instead of 2 trillion over the next
decade). This is, it should be said, not merely twice as big as the Republican
package but also twice as stupid and boneheaded. Regardless, that's how things
stand--Republicans are likely to refuse Obama's 4 trillion in favor of their 2
trillion, which is only half as stupid so on net good for the country. Good
for them, but unfortunately it undermines the Cato dude's argument about it
being about the deficit.

~~~
3pt14159
The people that existed at the time these benefits were enacted shouldn't have
accepted or allowed a cash-in-cash-out program if they wanted the government
to have a _legal obligation_ to pay SS, pensions, etc. The baby boomers are
double dipping in almost every way. They live longer, but don't want the
ceiling on the retirement age lifted. They want extravagant senior medical
programs from the government, but don't want to actually save up to pay it.
They want pensions that never did real actuarial accounting to figure out if
they could meet their "defined benefits" obligations. They (rightly or
wrongly) legalize abortion leading to 50 million
(<http://www.guttmacher.org/pubs/fb_induced_abortion.html>) fewer people in
the demographic that would be supporting them in a cash-in-cash out scheme.
They exported dollars when the US was the only major capitalist power. They
took inheritance from their parents but (generally) failed to either pay for
their children's post secondary education, save up for retirement, and/or
leave an inheritance for their children. They are banking on their house
capital and reverse mortgages to pay their bills. They have debt on their
cars, houses, and anything else that is remotely a non-depreciating asset.
Don't even get me started on the cheap oil and coal that they pulled out of
the ground without investing in longer term (and ultimately cheaper) power
sources like nuclear.

It's as if Joseph told the pharaoh that "7 years of plenty are coming..." and
the pharaoh cut him off before he could finish and said "hey everyone, we'll
be doing really well for a while, let's start a huge party!" And everyone
partied so hard they had to borrow from their poorer neighbors because the
party was going so strong all their neighbors just said to themselves "oh they
are good for it," and after 7 years of partying really hard they said their
children had a "legal obligation" to make sure they could still party during
the 7 years of famine that all of them ignored.

But it is ok, right? Because "in the long run we are all dead" and it takes a
Austrian Economist so long to be right, by the time it come to paying the
piper everyone has forgotten and is asking themselves "why didn't anyone see
this coming?"

~~~
scarmig
There's a lot to agree with here and a lot to disagree with. But I think of it
as a separate debate. The fact remains that those obligations do exist. Even
if conceded that it was stupid for us to enter into these agreements, they're
still legal and still have legal force. If your company agrees to pay another
company for some service or product but then refuses to do so at the end of
the month, that's both illegal and immoral. Same deal here.

------
wccrawford
2003? My God, how will we ever live with only the funding from such a... Wait,
2003? We spend THAT much more money than we did in 2003? That's absolutely
ridiculous.

It's time this country learned to live within its means. That goes for the
government and the people in it, too.

~~~
wheels
That's somewhat naive, as is this article, though I assume the author is being
intentionally so.

Counterintuively, during a recession, the government is usually the only
entity that's able to pump enough money into the economy to fuel growth and
ultimately end the recession – i.e. the time that its spending is most
critical is when its income is at a low. The Great Recession lasted so long
precisely because the government tried to "live within its means" rather than
getting out the jumper cables. This is also central to the current debate
about the best course of action for EU countries, most notably Greece, at
present.

The danger of simply cutting costs is that it may plunge the country into
prolonged recession and ironically impair the country's ability to manage
manage its debt effectively. Punditry aside, it's typically been the Democrats
in recent decades that have put more effort into reducing the national debt
(as Obama is proposing now through increased taxation).

At least in theory, if not always in practice, the entire American political
spectrum agrees that US debt must be minded and that the current level
relative to the GDP is sub-optimal. But the ability to repay debt is linked to
the health of the economy, and the goal is to avoid being penny wise and pound
foolish.

~~~
jerf
"Counterintuively, during a recession, the government is usually the only
entity that's able to pump enough money into the economy to fuel growth and
ultimately end the recession"

Yes, that's the _theory_. But look around you. Is it _working_?

No. We're doing way worse than those recessions where we instead responded by
cutting taxes and actually living within our means.

This theory is _wrong_.

It's 2011. If this were going to work, _it would have worked by now_. It's not
three months after the crisis anymore and it's past time to stop talking like
it is. This approach is now a _concrete failure_ , and I really don't buy the
whole "it just wasn't big enough"; it's already far larger than it ever has
been before, and what we've got is a far larger failure than ever before. (And
I mean, policy failure, not just financial crisis size.) It's time for people
to stop running around and talking as if the bastardized Keynesian economics
the government is babbling about has any sort of connection to reality.
They've have repeatedly utterly failed to correctly predict the effects of
their policies, and that's the standard that matters in the end, more than
anything else.

We've tried spending like drunken sailors. It's time to try... not.

~~~
Locke1689
First, the bank bailout was successful in its primary goal -- do you see a
global collapse of financial lending?

Second, the market is actually doing quite well, as predicted. Jobs, on the
other hand, are not so great. Basic economics predicts that stimulus via
infrastructure spending is the best way to accelerate growth in the job market
-- which is exactly what we didn't do.

I have no idea where you got the idea that this recession was treated with an
all-out spending spree. It wasn't. The same fiscal austerity measures that are
failing Europe are going to be implemented in the US and fail just as badly.

~~~
jerf
"Basic economics predicts that stimulus via infrastructure spending is the
best way to accelerate growth in the job market -- which is exactly what we
didn't do."

Which is why I carefully qualified my statement with _bastardized_
Keynesianism. I don't mean that as a pure insult; I don't particularly believe
it's the best economic model, but I don't have much evidence either way w.r.t.
the current situation, because it isn't what our government is actually using.
It's what it _claims_ to be using as cover, but take Keyne's theories and feed
it the actions of our government, and the anemic recovery and ballooning debt
is pretty much what it predicts too.

Proper government spending may be the _best_ way out of a recession (I'm very
skeptical about it, but it may be true), but even Keynesian theories would
seem to say that _no_ spending would better than spending that has a less-
than-unity "multiplier". I am much, _much_ less willing that most people to
simply _assume_ without actual evidence that spending _must_ have a over-unity
multiplier, and I don't see much evidence that our current spending does.

"I have no idea where you got the idea that this recession was treated with an
all-out spending spree"

Reading what Keynesianism says and comparing it what money is actually being
spent. The so-called "stimulus" has virtually no relationship to what the
theories call for (it isn't _quite_ zero, but spending that actually conformed
to Keyne's theories were in the high single-digit percents of ARRA last I
knew), and there doesn't seem to be any other really compelling philosophy
behind ARRA, so barring some other coherent explanation of how the actions of
the government are supposed to be helpful, I'll characterize it as an all-out
spending spree. It isn't that big of a leap. You just have to look at what is
actually being done, and not what is being said.

~~~
Locke1689
_You just have to look at what is actually being done, and not what is being
said._

Yes, but what _you_ said is:

 _Yes, that's the theory. But look around you. Is it working? No. We're doing
way worse than those recessions where we instead responded by cutting taxes
and actually living within our means. This theory is wrong._

This implies that the Keynesian theory of stimulus spending is wrong but you
yourself admit that what is actually being done is not what is suggested by
theory, it is some strange bastardized form. Actual Keynesian theory has been
practiced in previous times and has succeeded relatively well. Even in this
recession, the Scandinavian economic response is mostly Keynesian and they
have weathered the recession very well.

~~~
jerf
"This implies that the Keynesian theory of stimulus spending is wrong"

Actually, we brought in the word "Keynesian" later. The original message I was
replying strikes me as being based on the idea that it's just "spending",
especially at the point where it claims that the Great Recession is from us
"living within our means", which is a claim that just boggles my mind. The
theory is that unqualified government spending is what pulls economies out of
recessions; the reality is that isn't working, and also, it's not really
Keynesianism. No contradictions.

------
zmj
That's fairly accurate regarding the first-order consequences of hitting the
debt limit. Second-order consequences come from:

-An abrupt drop in consumer spending due to paychecks lost in that 43% cut.

-Moody's and S&P have committed to downgrading the USA's debt from AAA if the debt ceiling is not raised. Remember the liquidity crisis the financial sector suffered in 2008 due to a sudden shortage of AAA bonds? There are a lot of Treasuries out there.

I'll leave third-order consequences up to the post-apocalyptic novelists in
the audience.

------
inthewoods
"The real fiscal Armageddon that this country faces comes not from a delay in
raising the debt ceiling, but from out-of-control federal spending and
government debt.

If a little pain now helps solve that problem for the long term, it may well
be worth it."

Great idea - you're pretty sure that everything will be ok if we don't raise
the debt ceiling, so let's go ahead with it and just hope that you're right
and it isn't that bad.

The only real threat to drive up US interest rates is not raising the debt
ceiling. With the stuff going on in Europe, we will likely have more people
wanting to buy US Treasuries - not less.

These guys are worried about an event that hasn't happened, and doesn't seem
to be happening, so instead they're going to do the one thing that can
actually cause it happen.

Insane.

------
marcamillion
This has to be one of the most myopic economic pieces I have seen in a while.

I am not even American - heck I don't even live in America - but I shudder at
the thought of America not being able to honor all legal obligations.

It's not about the money. It's not about how much money the US gov't will
collect in August vs how much it has to pay out. America is the largest
economy on the planet with the largest bond market and subsequently the
largest government bond market. It also happens to enjoy, as the french put
it, exhorbitant privilege - because not only can it borrow in it's own
currency, but it can print new money to repay outstanding obligations. No
other country on the planet has that ability to do that.

The entire bond markets have rated the US gov't's abilities to repay said
bonds at the highest rating for at least the last 30 years.

A 'minor' disruption like this, at a time when job numbers in the US
consistently disappoint. When only God HE knows what will happen with the
Euro, all it takes is some event like this to send the entire global economy
back into recession and possibly worse.

If the economy goes into a whirlwind now, where sovereign bond markets are
threatened, the repercussions could be even more severe than the credit market
freeze we just saw.

Imagine if it escalates - although it is easy to say, it will never escalate,
well I always said we would never reach this point, and look at where we are
now - and creditor countries don't want to invest in Treasuries any more, the
repercussions could be disastrous and could lead to Nuclear War.

I know it sounds hyperbolic, but imagine if America can't pay it's bills and
China doesn't want to lend it money to pay it's bills...what choice does
America have but to go to war with China? Especially when the government is
under intense domestic pressure because they never extended the damn debt
ceiling and avoided this in the whole place. It almost becomes the least worse
choice. War with China or domestic revolt.

Sure you say, Americans would never revolt - but when SS checks stop arriving
and tons of old people can't get their health care taken care of, let's see if
you still say that.

Not to mention that if America defaults on the debt, it could send ripples all
throughout China and cause significant issues there leading to an implosion of
economic activity - which would actually incentivize China to go to war with
America.

Again, I know it sounds very hyperbolic and VERY far-fetched, but so did the
real estate market collapsing in the middle of the worst credit bubble burst
America has ever seen.

It's all about timing.

The world is not in a position to deal with a default like this in a measured
manner.

God help us all, if it ever comes to a default right now.

Talk about the perfect storm.

------
ebiester
I don't understand this. Shut down the military short of non-essential
functions, shift money to bringing soldiers home now, and cancel every
military contract. See how long before the Republicans capitulate. The
executive branch holds the keys to military spending.

Foreign aid to Israel and Egypt is magically delayed, too. This debt ceiling
could be used to hit goals that the progressive movement has wanted for years
and put the Republicans in a weak position for negotiating. Everyone would
hurt, of course, but it wouldn't last long before Republicans blinked.

~~~
johnny22
there are defense contracts in every single state of the union, so such a
thing is quite infeasible in any near term time frame as that would just make
the jobs situation worse than it is now.

~~~
ebiester
And this is superior to other cost cutting measures how? Jobs will be lost any
way you cut the deficit.

------
NotASockPuppet
How callous is this man? 44% cut in funding to who? Not to the Banks and
Institutions that caused the GFC and the whole problem in the first place.
Please name me one ill or unemployed person who had a hand in this whole mess?

------
mikeryan
"What the Debt Ceiling Really Means"

\- from a conservative think tank's perspective. No one blinked an eye from
the conservative side as deficit spending rose all through the Bush
administration and the debt ceiling got raised 7 times.

Heck this article may even be technically correct but it skews hypocritical
when it only becomes an issue during Democrat's administrations.

~~~
spottiness
The Cato institute is not a conservative think tank, as in "conservatives vs
liberals or republicans vs democrats". They are a libertarian think tank, and
have been very critical of the Bush administration for exactly the same
reasons that you mention plus others.
(<http://www.cato.org/pub_display.php?pub_id=3750>)

If the article is technically correct though, that's all that matters. Let's
use facts expressed in numbers to make decisions and leave emotional concepts
like "hypocrisy" to artists.

~~~
altcognito
Yeah, but it's completely wrong:

"If we are really worried about a hike in interest rates, what about the hike
we can expect if we fail to get federal borrowing under control?"

Interest rates are as low as they've ever been. In fact, the only "threat" of
our rates for borrowing going up have not been for borrowing more, but quite
the opposite.

[http://krugman.blogs.nytimes.com/2011/07/10/feel-the-
pressur...](http://krugman.blogs.nytimes.com/2011/07/10/feel-the-pressure/)

"The real fiscal Armageddon that this country faces comes not from a delay in
raising the debt ceiling, but from out-of-control federal spending and
government debt."

Except that this "out of control" federal spending has been _rising at the
same rate as a % of GDP_ essentially since 1950.(minus a blip in 1992)

[http://www.usgovernmentspending.com/us_20th_century_chart.ht...](http://www.usgovernmentspending.com/us_20th_century_chart.html)

It's fair to say we have both a spending and a revenue problem. This page
shows how revenue has been dipping pretty dramatically the last couple of
years: [http://www.deptofnumbers.com/blog/2010/08/tax-revenue-as-
a-f...](http://www.deptofnumbers.com/blog/2010/08/tax-revenue-as-a-fraction-
of-gdp/)

