As the sun rises in the east, the debt ceiling will be raised. Getting there, however, will be harrowing. Which is a good thing.
Treasury Secretary Tim Geithner warns that failure to raise the limit would be disastrous. In that he is correct. But he is disingenuous when he suggests that we must do so by August 2 or the sky falls.
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There is no drop-dead date. There is no overnight default. Debt service amounts to about 6 percent of the federal budget and only about 10 percent of federal revenues. This means that for every $1 of interest payments, there are roughly $9 of revenue the government spends elsewhere.
Move money around — and you’ve covered the debt service. Cover the debt service — and there is no default. What scares Geithner is not that we won’t be able to pay our creditors but that his Treasury won’t be able to continue spending the obscene amounts of money (about $120 billion a month) it doesn’t have and will (temporarily) be unable to borrow.
Good. The government will (temporarily) be forced to establish priorities. A salutary exercise.
Equally salutary is the air of crisis that will be generated by the fear of default. We shall have a preview of what happens when we hit the real debt ceiling several years from now, i.e., face real default. That’s our current fiscal trajectory. Under President Obama’s budgets, debt service, now $214 billion a year, climbs to $931 billion in a decade.
The current debt-ceiling showdown, therefore, is an instructive dry run of an actual Greek-like default, which awaits if we don’t solve our debt problem.
With one difference, of course. During today’s debt-ceiling fight, if the markets start to get jittery, interest rates on U.S. debt spike, and the economy begins to teeter, the whole thing can be called off with a push of a button — an act of Congress hiking the debt ceiling. When the real crisis comes, however, there is no button. There is no flight-simulator reset. We default and the economy really does crash.
Which is why the current debt-ceiling showdown is to be welcomed. It creates leverage to force fiscal sanity.
But it can be a dangerous game. Republican demands must therefore be well-crafted. Fortunately, they are. Senate minority leader Mitch McConnell is pushing for budget cuts in the next two years. The effect would be real and multiplicative — when you cut the baseline budget, the savings get repeated year after year.
Spending caps are more problematic. They have a baleful history. Experience shows that Congress can padlock the refrigerator door but as long as Congress can still access the key, the gorging never stops.
I would suggest, therefore, enacting spending caps that could be overturned in future years only by supermajority — say, two-thirds of both houses. Now, of course, a future Congress could undo this whole scheme by repealing the caps through legislation that would require only a simple majority in both houses. But as long as Republicans maintain the House, they could block this maneuver. The caps would be essentially unrepealable.
In this spending-cut tug-of-war, it is of paramount importance to frame your demands in a way that the public sees as reasonable. The side that can command public opinion will prevail — the other side will ultimately cave for fear of being blamed for whatever dislocation occurs. Republicans should not be asking for, say, repeal of Obamacare as the quid pro quo for raising the debt limit. These are bridges much too far for these negotiations.
Which is why House speaker John Boehner’s offer of a dollar-for-dollar deal — raise the debt ceiling to match corresponding spending cuts — is a thing of beauty. It is eminently logical and easy to understand. In a country with a huge 47 percent to 19 percent plurality opposed to raising the debt ceiling, the Boehner offer is difficult for the president to refuse.
After all, it invites Obama to choose how much to cut. For example, $500 billion buys him a $500 billion debt-limit hike — and only a short-term extension. Not wanting to go through this process again, Obama would like a $2 trillion debt-limit hike to get him past Election Day 2012. For that, he’ll have to come up with $2 trillion in spending cuts.
I agree that the debt ceiling will be raised, but have to disagree that it must be.
Perhaps I've missed the exlanation, but how does a "dollar for dollar" swap help our situation?
What should be driven home to American voters is:
1) not raising the ceiling does not cause a financial disaster unless the Admin and Treasury desire one. We just proved that over the past month!
2) all that government waste, overlap and repetition weve heard about and made fun of for decades - is not a laughing matter and must be eliminated.
This is a topic every American understands from business owners to home owners to a child with an allowance to a bum returning bottles to a crook stealing identities. Income is a finite pie to be divided. You make choices on how it is done. Do you go to a movie with popcorn, candy and drinks; or do you buy the new "Call of Duty" game? If you go to just the movie, will saved concession dollars buy the game? If not, you CHOOSE.
The only way to spend more is to increase the size of the pie. Unfortunately, government thinks pie is pi, and their pi is infinite.
While the repeal of Obamacare may be a bridge too far in Mr. Krauthammer's view; it must nonetheless be the elephant in the room when negotiating. Its repeal alone would go a long way toward LONG TERM fiscal sanity.
This is not the time to go wobbly. As Mr. Krauthammer correctly points out we are a long way from real default. Pedal to the metal, make the Democrats defend an indefensible spending plan that includes an economy wrecking ADDITIONAL entitlement.
Who knows, maybe King Barry will prefer re-election over a Carter type legacy.
Eliminating fraud, waste and abuse will not close the budget gap. Every president since I became politically aware has promised to cut the dreaded three.
Cutting discretionary spending alone won't do it, we have to get entitlements under control. I think Boehner's offer of dollar for dollar is about as good as it is going to get with the Republicans only controlling the House. The Reid Senate hasn't produced a budget in over 2 years, they'd be happy to operate the government on CR's for the next 20 years.
Brinksmanship over the debt ceiling might poll well, but "fiscal sanity" it is not. Unless suicide is the new standard for sanity.
Krauthammer is so deep inside the beltway he thinks nothing but political advantage exists. Meanwhile, the country's actual finances are being destroyed. If that prospect hasn't forced the Republicans to do anything about it, and it hasn't, why does he think it will force the Dems to do anything about it? Hint, it hasn't and it won't. They will just see political advantage in blaming Republicans for any resulting mess.
And around we go. It is the playground hissy fit hour, and there isn't one adult left in government.
“Application of the Legislatures of two thirds of the several States, shall call a Convention for proposing Amendments” when the People and States stop waiting for Congress and demand a balanced federal budget.
There is no golden BB. A constitutional amendment to limit spending to a percentage of GDP, to illustrate just one possibility, leaves open the question of what constitutes GDP? One Keynesian formula is - GDP = private consumption + gross investment + government spending + (exports − imports).
If you leave all government spending in the formulation, you have a mix of productive (i.e. procurement of actual goods and services) and non-productive (subsidies, transfer payments). One frightening thing about Obama is that GDP growth stinks even under this Keynesian formula.
I hate to say this out loud, but I fear the only workable control on spending is the control we exercise at the ballot box.
First it was the collapse of the "continental dollar" in 1780.
Then the French assignats in 1793.
Then the Rentenmark in Weimar Germany in 1923. Now the Euro in Greece in 2011.
Same old story with the same sad ending. The virus reached metastatis. If the danger in the problem cannot convince then the problem will achive equilibrium in the most rude fashion.
Quid Pro Quo isn't an elegant solution when what is exchanged is worthless. Economics as the dismal science is a half truth
Politically, I think JasonC is correct that the president and the Democrats are probably more willing to play brinksmanship than the Republicans because they can count on the media to blame the GOP for any major downturn in the economy. However, U.S. presidents have always taken the blame or credit for the economy in the past. I think that President Obama has already managed to go longer than almost any other president could with abysmal economic performance. President Obama is already living on borrowed time regarding the economy and he simply does not have the political capital to withstand a major economic downturn.
As for the real world effects, a major downturn will hurt a lot of people. The GOP needs to keep this in mind regardless of the likely political benefits from a bad economy.
Unfortunately, in Washington winning the argument has become more important that being correct on the policy, and I fear that most of the electorate - -even the "elites" in academia and the press -- don't recognize the difference.
I think it's clear that the debt ceiling and deficit fight is not the top priority right now. Any of you read the news? See the jobs and unemployment report?
You are begging the question. Your comment makes no sense unless we assume that running larger deficits ("Keynesian stimulus") is good for the economy now.
I am guessing Krauthammer's miserable failure as speechwriter for Walter Mondale has at least something to do with his ongoing campaign to delegitimize Palin. I would wager that Krauthammer wrote the line that sank Mondale: "Mr. Reagan will raise taxes; and so will I. He won't tell you. I just did." I suspect Krauthammer is still smarting from his colossal election failure and from time to time is re-fighting the campaign against that phony cowboy Reagan.
Unfortunately, Krauthammer, Congress isn't messing with a "simulator" as you so casually put it. The reaction to debt ceiling brinksmanship will play out in the REAL WORLD ECONOMY.... So why don't you put your money where your mouth is and offer your career as the first "simulated" casualty of the game.
For some reason I doubt that will be happening... it's real easy to play games when other people's livelihoods are on the line.
@Sparky,
Not to close the gap, but to have them find their additional spending dollars. The waste illustrates why government gets no more money until they prove responsible with our pocketbooks.
Sorry Charles but I cannot go with you on this one. Dollar for dollar is not going to make a difference since current administration increased the deficit four fold. Suggest spending levels are cut to what they were in 1995. Then you may see some actual reductions in the deficit take hold. Put an end to this endless trail of creating more social programs. Let the folks at home and the private sector do the rest and maybe we can change the course before it all comes crashing down around our ears.
It does not matter when Charles K worked for Mondale. The fact that he did at all disqualifies him from being somebody conservatives should take seriously. He wrote speeches for a man that could only win one state. And he wants to lecture us that Palin can't win? I don't think he has the best political instincts.
Matt,
Yes, he did work for Mondale. That was over 30 years ago. Did you also believe that Reagan should not have been the President since he was a Democrat and an admirer of FDR and the New Deal? People change, grow and adapt.
If you have a point to make about what Krauthammer wrote then make the point. The fact he wrote speeches for Mondale 30 some odd years ago is next to meaningless.
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