The Treasury Department estimates that at the current rate of government spending, America’s debt will crash through the $14.3 trillion ceiling in April or May. And the debate over whether or not to raise the debt ceiling has delivered some trash talk that would make today’s sports stars proud.
“We need to have a showdown … we’re not going to increase our debt ceiling anymore,” declared Sen. Jim DeMint, South Carolina Republican.
“I don’t see why anybody’s talking about playing chicken with the debt ceiling,” countered Austan Goolsbee, chairman of the president’s Council of Economic Advisers. “If we get to the point where you’ve damaged the full faith and credit of the United States, that would be the first default in history caused purely by insanity.”
Congress instituted the debt limit in 1917 in order to keep its spending in check. It worked for a while, but in the 1980s, both political parties figured out they could spend more by simply voting to raise the limit. In the past 10 years alone, Congress has raised the debt limit 10 times.
So what happens if the government doesn’t raise the debt ceiling?
While it is true Congress has never before refused to raise the debt ceiling, it has frequently taken its sweet time to do so. In 1985, Congress waited nearly three months after the debt limit was reached before authorizing a permanent increase. In 1995, 4 1/2 months passed between hitting the ceiling and congressional action. And in 2002, Congress delayed raising the debt ceiling for three months. In each case, the U.S. and the economy survived.
Sen. Pat Toomey, Pennsylvania Republican, proposes that the federal government prioritize paying the national debt above all other spending. The most recent Office of Management and Budget data shows federal revenues will reach $2.17 trillion this fiscal year. Interest payments on the nation’s debt are estimated to be $205 billion this year, or about 10 percent of revenues. Taking that payment off the top, as Mr. Toomey’s plan would, leaves $1.9 trillion for Congress to spend. That’s enough to pay for Social Security ($741 billion), Medicare ($488 billion), and Medicaid ($276 billion), with $395 billion left for other programs.
Treasury Secretary Timothy F. Geithner called Mr. Toomey’s bill “quite harmful” and “unworkable.” And he used this analogy of a typical American homeowner to explain why: “A homeowner could decide to ‘prioritize’ and continue paying monthly mortgage payments, while opting to cease paying other obligations, such as car payments, insurance premiums, student loan and credit-card payments, utilities, and so forth. Although the mortgage would be paid, the damage to that homeowner’s creditworthiness would be severe.”
Mr. Geithner, however, mistakenly assumes that American homeowners always pay their expenses with borrowed funds (the way the government does). Most do not. When tough financial times hit, families eat out less, go to fewer movies, buy fewer clothes and postpone vacations. If those things don’t save enough, then they might borrow money to pay bills or skip payments.
Congress has largely avoided those vital cost-cutting steps that families take. The feds have not reduced spending amid the lower revenues of the recession. Now, the Obama administration says if we don’t raise the debt ceiling, the nation could go into catastrophic default.
But as long as the United States continues to run budget deficits, our ability to borrow money cheaply, with low interest rates, is the real key to avoiding default. For example, let’s assume that interest rates don’t change and continue to stay low. In that case, in the year 2020, 70 cents of every federal dollar would be spent on interest to service the debt, Social Security, Medicare and Medicaid. But if interest rates rise by just 1 percent, 90 cents of every dollar would go toward the debt, Social Security, Medicare and Medicaid, leaving just 10 cents to split among education, defense and all other discretionary items.
As the national debt and entitlements eat up an increasingly large share of the budget pie, those on the left who want to protect government funding for other programs they view as vital should see the urgency in paying down the debt.
“The fact that we’re here today to debate raising America’s debt limit is a sign of leadership failure,” then-Sen. Barack Obama said in 2006. “Leadership means ‘the buck stops here.’ Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better. I therefore intend to oppose the effort to increase America’s debt limit.”
Mr. Obama had it right back then.
Veronique de Rugy is a columnist at Reason magazine and fellow at George Mason University’s Mercatus Center. Jason Fichtner is also a fellow at Mercatus and previously served as chief economist of the Social Security Administration.