Raise The Debt Ceiling

The debt ceiling is going to have to be raised. In many ways this is unfortunate. The debt is too high, and bringing it down – at least as a percentage of national income – should be a policy priority for the medium term. But, right now, it is going to have to be raised. Since the debt ceiling will be reached within a months, certainly, and a few weeks, probably, the alternatives are not politically palatable and risk being economically disastrous.

To avoid hitting the debt ceiling, the US would have not merely cut its deficit, but eliminate the deficit entirely in a matter of weeks. This would involve either increasing taxes to a cripplingly high rate or cutting spending by an enormous amount – some 10% of total national income. While there is much spending which could – in principle – be cut from the federal budget at very little harm and much medium term good, it may not reach the scale we are talking about, and Washington has, in any case, proved extremely bad at identifying the wasteful spending. There is also much disagreement about what constitutes wasteful spending. Common Sense would classify virtually all spending by the Department of Agriculture, for example, as not merely wasteful, but actively harmful to the economy. But even if there was a political consensus for this, it still doesn’t mean that such subsidies could be eliminated without short term costs.

Imagine, for example, that you supply hammers to the Pentagon at $1,000 each. While we can all agree that it is a good idea to terminate this contract – or rather everyone except you can agree this – eliminating the waste still has costs. You are out a lot of money. And if you stop spending that money, the people you buy stuff from are also out a lot of money. Unemployment could rise.

Eliminating spending – even really stupid spending – fast enough to eliminate the deficit in a matter of weeks would probably lead to a new recession. For comparison, the debate in the UK is about whether to eliminate the deficit over five years or whether to halve it in five years. The Government prefers the first option, but some think this is too risky.

Unfortunately, the debate in the US has degenerated into mere abuse. For example, some on the left are claiming that the alternative to raising the debt ceiling is the US defaulting on its debt. While Greece is doing exactly that, the situation in the US is not that desperate, yet. Defaulting on the debt would dramatically raise the cost of borrowing money in the future. The claim that the US would have to default on its debt if the debt ceiling were not raised is simply false. There are many other spending areas which could be cut or postponed if this situation arose. It might be that the Obama administration would choose to default on the debt rather than make other cuts, but if that is the President can hardly blame his opponents for the scenario.

In practice, the Republicans will force the Democrats to agree to some minor spending cuts and the Democrats will force the Republicans to agree to some minor tax increases, and then they will both agree to raise the debt ceiling, thus postponing the problem for a few more years.

(n.b. This article was published in July 2011 before the US Budget agreement.)

Article provided by Quentin Langley
Lecturer in PR and Political Communications,
School of Journalism, Cardiff University

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