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The Problem With Opposing a Debt Limit Increase Without Opposing the Policies That Breach the Debt Limit

January 13th, 2011 . by economistmom

Hmmm….. According to a Reuters/Ipsos poll released this week:

The U.S. public overwhelmingly opposes raising the country’s debt limit even though failure to do so could hurt America’s international standing and push up borrowing costs…

Some 71 percent of those surveyed oppose increasing the borrowing authority, the focus of a brewing political battle over federal spending. Only 18 percent support an increase.

Yet from the same poll (emphasis added):

Only 24 percent say the country can afford to cut back on education spending, a likely Republican target, and 21 percent support cuts to law enforcement.

With the Pentagon fighting wars in Afghanistan and Iraq, 51 percent supported cutbacks to military spending.

Less than half, 45 percent, support an expected Republican effort to pare environmental enforcement.

Some 53 percent support cutting the budgets of financial regulators like the Securities and Exchange Commission, in spite of the widespread consensus that a lax regulatory atmosphere contributed to the devastating financial crisis of 2007-2009.

And 47 percent support cutbacks to national parks, which were shuttered for several weeks during the budget battles of 1995 and 1996.

Expensive benefit programs that account for nearly half of all federal spending enjoy widespread support, the poll found. Only 20 percent supported paring Social Security retirement benefits while a mere 23 supported cutbacks to the Medicare health-insurance program.

Some 73 percent support scaling back foreign aid and 65 percent support cutting back on tax collection.

I wonder:  is that supporting cutting back on “tax collection”–as in administrative and enforcement costs–or cutting back on taxes collected (i.e., taxes, period)?…

The Concord Coalition has updated our issue brief on the debt limit, which explains that holding the line on the debt limit would not literally stop the policies that increase our debt; it would simply cause us to default on our (still increasing) debt:

Approval of a debt limit increase is necessary to maintain the full faith and credit of the United States government. Failure to approve an increase would not be an act of fiscal responsibility, unless it can be said that deadbeats are fiscally responsible because they refuse to pay their bills. It would result in the United States defaulting on the commitments it has already made, including Social Security, Medicare and veterans benefits, vendor payments, tax refunds, student loans and interest payments on outstanding debt.

The consequences for government finances, the economy and financial markets would be dire as investors would no longer be able to count on U.S. bonds being the “safest investment in the world.” Delaying action on an increase until the last possible moment, forcing Treasury to utilize extraordinary measures to avoid a default, is unnecessary and irresponsible.

Unlike budget enforcement mechanisms such as statutory spending caps or the pay-as-you-go (PAYGO) rules for entitlement expansions and tax cuts, the debt limit places no restrictions on specific tax and spending decisions. If deficits result from these policy decisions, or if the economy fails to grow as projected, the debt limit must be increased to prevent a default on the government’s obligations.

Moreover, no plausible set of policy options have been proposed, nor do they exist, for preventing a breach of the current limit.

In other words, instead of holding the line on the costs of government spending, choosing to not increase the debt limit would dramatically raise the cost of maintaining our ongoing commitments by turning “safe” Treasuries into “risky” ones that would command higher interest rates.

10 Responses to “The Problem With Opposing a Debt Limit Increase Without Opposing the Policies That Breach the Debt Limit”

  1. comment number 1 by: Roy Arellano

    Very balanced. I think, sadly, that most Americans are, to put it frankly, ignorant or illiterate to how things work. Sadly I think those in power, on both sides of the aisle are so smart and have so much “power” that they thrive on it.

  2. comment number 2 by: Gipper

    Economistmom,

    I’ve yet to hear from or read one person who can cite a law that contradicts the following.

    60% of current government expenditures are financed by tax revenues. Once the government hits the debt limit, the tax revenues will continue to be collected.

    What prevents the President from simply deciding the most important 60% of the budget to continue financing while shutting down the remaining 40%?

    For example. Enough money would be collected to pay interest on the debt, Dept. of Justice, Court system, FAA and other health and safety functions, Dept. of Defense operations directly in support of war fighting and maintenance of base operations throughout the world, and Social Security. Most of Medicare payments could continue, but not all.

    Please, please, please, would someone cite a statute or provision of the Constitution that prevents the President from doing what I’ve suggested?

    Because until I hear that explanation, all this talk of a general government shutdown is simply irresponsible scaremongering from Democrats. If the public realized that the President could continue to maintain operational status

  3. comment number 3 by: Gipper

    …………… of the most important federal responsibilities, then this “crisis” would take on a different tone.

    Few tears would be shed by many of us if all the remaining Departments went dark, and the states assumed responsibility for those functions abdicated by the federal government.

  4. comment number 4 by: Gipper

    Also, Congress has the option of redefining the debt limit to exclude intragovernment debt from the Social Security Trust Fund. Publicly held debt is the only debt covered by Article 1, Section 8 of the Constitution. Let’s dispense with this myth that the Social Security Trust represents some kind of debt that anyone with seriou knowledge of fiscal matters takes seriously. It should go the way of Santa Claus and the Easter Bunny.

  5. comment number 5 by: Arne

    This is why we have representative government. We actually depend on our Congress to be more informed than we are.

    Unfortunately, we don’t really elect them on that basis.

  6. comment number 6 by: Shadowfax

    The folks conducting the polls need to start adjusting their questions so folks are forced to prioritize their answers. For example:

    We have a $1.3 trillion deficit. This requires spending and tax changes.

    Rank the following in order of preference:
    a) Income tax rate increases
    b) Payroll tax rate increases
    c) National sales tax of 2%
    d) Removing the $107,000 cap on the Social Security payroll tax.

    Rank the following in order of preference:
    a) Treating healthcare premiums paid for by corporations as income
    b) Eliminating the homeowner mortgage deduction
    c) Eliminating the municipal bond interest exemption

    Rank the following in order of preference:
    a) Cutting defense by 20%.
    b) Cutting all Federal Departments (e.g., Education, Transportation) by 20%
    c) Freezing Social Security at current purchasing power levels (e.g., payouts go up only with inflation)

    Rank the following in order of preference:
    a) Taxes on soft drinks ($1/can or bottle)
    b) Taxes on gasoline ($1/gallon)
    c) Taxes on Wall Street Trades

    You get the idea. We need to get folks the choices and let them prioritize, like the census.

  7. comment number 7 by: Shadowfax

    By “like the census” I mean an official government survey.

  8. comment number 8 by: SteveinCH

    Shadow it doesn’t work unless you prioritize across all your lists and, like many of the “budget calculator” exercises that exist, the list is necessarily limited and the potential solutions are limitless.

  9. comment number 9 by: SpendingHawk

    I just read Heritage Foundation’s Fact Sheet: “The Debt Ceiling: Time, Options, and Action.

    It affirms my contention that there is no risk of default. Contrast that with the Concord Coalition’s brief on this topic:

    “If Congress fails to act, what are the options the Treasury has to avoid breaching the debt limit? The U.S. Treasury can employ a few financial maneuvers to avoid breaching the debt limit and defaulting on the national debt. These transactions are benign and completely legal, but they are a source of unease among lawmakers and the public. Moreover, all of these machinations merely postpone the inevitable — an increase in the statutory debt limit.”

    So we can see that the Concord Coalition is part of the Democrat scaremongering operation, or the brief was written by someone who didn’t know what they were talking about.

    No mention in the Concord Coalition brief as to what happens to all of the tax revenues that continue to flow into the Treasury’s coffers when the debt ceiling is reached.

    Will taxes cease to be withheld from our paychecks during a debt limit crisis? If not, then all of these scare tactics are nonsense.

  10. comment number 10 by: Vrooom

    It seems obscene to vote for a huge spending bill in the form of tax cuts, then refuse to pay for them. Of course tax revenues keep coming in, but those tax revenues are insufficient to pay for the tax cuts and budgets these guys voted for. Do the mature thing, raise the debt limit, and immediately propose legislation to limit spending so it doesn’t have to be done again. If the US defaults on any obligations, the days of cheap debt are over, during war, peace or otherwise.