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The other day, I blogged on the necessity of increasing the debt limit. And I got a remarkable response: The tea party and others on the right fringe of American politics appear to believe that hitting the debt ceiling is no biggie, since all Congress would have to do is reprogram tax dollars to pay creditors first and use what’s left for other priorities. The rest of government would, sniff, have to be abandoned.
I can understand why this view is so attractive to the right. After all, it allows them to downplay the real significance of breaching the federal borrowing limit and at the same time kill lots of government programs. The trouble is, they are completely misinterpreting the consequences of exceeding the debt limit. It is in fact, a public policy non-sequitur—something like responding to the question, “Do you want to go the ballgame” with, “I found a great fruitcake recipe.”
Part of the problem, as my colleague Donald Marron notes, is that Treasury Secretary Tim Geithner has muddied the rhetorical waters by warning about the potential of government defaulting on its debt if the debt ceiling is breached. While it is true that this is a theoretical problem, it is not the immediate risk of exceeding the debt limit.
Let me explain: The debt cap —now $14.3 trillion—is the legal maximum the federal government is allowed to borrow. Sometime over the next few months (maybe May, or maybe July, depending on how much cash Geithner has squirreled away in government coffers) the Treasury will reach that limit. And at that moment it will be legally barred from borrowing any more money.
This is not about defaulting on outstanding bonds, as Representative Michele Bachmann (R-MN) and others on the right insist, and as Geithner has clumsily threatened. It is about Treasury’s ability to borrow money to pay for commitments Congress has already made. Just weeks ago, Congress passed a budget for the remainder of 2011 that requires the government to borrow an average of more than $100-billion-a-month through September. If tax collections are insufficient to pay this bill--and they will be—there is only one other source of money, and that is to borrow it. It would be beyond irresponsible for lawmakers to bar Treasury from doing that.
As I noted last week, since Congress passed a budget that generates $2.2 trillion in taxes yet commits to spending $3.7 trillion, it has to fill that $1.5 trillion gap somewhere. This is not theoretical money. It is real cash that goes to real people--paychecks for members of the armed forces, payments to doctors who care for seniors, and wages of construction crews that are repairing the towns devastated by this week’s tornadoes.
The long-term consequences of breaching the debt cap are even more serious. Every fiscal plan on the table, including the budget adopted by the House Republicans, would require the government to borrow trillions of dollars over the next decade. Every single one. The House budget, for instance, would require the government to borrow $1 trillion next year and $5 trillion over the next decade. With no debt limit extension, Treasury simply could not borrow that money. Thus, even after deeply cutting spending, Congress would have to raise taxes by $5 trillion. I somehow suspect that House GOP leadership is disinclined to do this.
Now it may also be true that the financial markets would go into a tailspin if Congress bars the U.S. from net new borrowing—a response that could sharply drive up interest rates. But that is speculation. By contrast, we know for certain what would happen to the fiscal situation.
There are only three options: Congress would have to boost the debt ceiling, adopt a massive trillion dollar-plus tax increase, or slash the government by more than one-third. Overnight. In the midst of a still-recovering economy. I anxiously await Rep. Bachmann’s detailed plan to do this.
The closer you look, the more you realize what a stupid debate this really is.
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