I promised to post some additional thoughts about the deficit
and debt ceiling. Here they are. I’ve included a number of links where you can
read more and view related charts.
Clarification on
Obama and the debt ceiling.
I’ve had some comments about Obama’s previous stance on
raising the debt ceiling. Some referenced
his opposition to raising the debt ceiling during the 2008 campaign. I didn’t find that. I did find a video where he discusses the
federal debt/deficit, but that is different from the issue of raising the debt
ceiling. In his 2008 campaign, Obama did
say that Bush’s fighting two unnecessary wars and driving up debt was
irresponsible. However, he was
discussing the issue of the federal debt NOT the issue of the debt ceiling
which are two entirely different things.
See video here: http://www.youtube.com/watch?v=ydZTHPkOnvE/
Apparently Obama did however vote against raising the debt
ceiling as Senator in March of 2006 as a protest against Bush policies. He said in a speech on the Senate floor at
that time: "The fact that we are
here today to debate raising America's debt limit is a sign of leadership
failure. ... Increasing America's debt weakens us domestically and
internationally. Leadership means that '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." Later, Obama said he regretted that vote and
his statement and his understanding of the potential for harm to the country
from NOT raising the debt ceiling convinced him that the debt ceiling wasn’t
the proper way to protest administration policies. In short, no wonder many Americans are
confused about the difference between the debt and debt ceiling. Even Senators who become future Presidents
can get it wrong. Read more at these
links:
Why is raising the
debt ceiling important and how does it relate to the deficit?
In a 2011 report, the U.S. General Accounting Office (GAO)
said this about the issue of raising the debt limit/ceiling and its impact on the
federal debt/deficit. I’ve highlighted
two important points that the GAO makes.
The debt limit does not control or limit the ability of the federal
government to run deficits or incur obligations. Rather, it is a limit on the
ability to pay bills incurred.
The decisions that create the need to borrow are made separately from—and
generally earlier than—the decision about the debt limit. Debates surrounding
the debt limit may raise awareness about the federal government’s current debt
trajectory and also provide Congress with an opportunity to debate the fiscal
policy decisions driving that trajectory. However, since this debate generally
occurs after tax and spending decisions have been enacted into law, Congress
has a narrower range of options to effect an immediate change to fiscal policy
decisions and hence to federal debt.
Failure to raise the debt limit could lead to serious negative
consequences in the Treasury market and for the ability of the United States to
finance federal debt at the lowest cost over time. Any delay in raising the debt limit that affects Treasury’s regular
and predictable schedule of auctions can create uncertainty in the Treasury
market. So too some of the actions Treasury takes to manage the amount of debt
near the debt limit, such as reducing the size of auctions, can compromise the
certainty of supply that Treasury relies on to achieve the lowest borrowing
cost over time. This uncertainty can, in turn, raise the cost of financing the
federal debt.
You can read the GAO report here:
First, as the GAO says, the debt ceiling is not a means for
controlling government spending or federal debt/deficits. Second, NOT RAISING the debt ceiling
INCREASES the deficit by INCREASING FEDERAL BORROWING COSTS over time. In short, if you are really concerned about
the deficit and government spending, the last thing you would want to do is NOT
RAISE the debt ceiling because you will just be making government operating
costs HIGHER because of INCREASED BORROWING COSTS. And, NO.
Like many businesses the government CANNOT operate very well without
BORROWING because the timing of receipt of federal revenues and expenses/bills
coming due don’t always coincide. It is
the same cash flow problem many (perhaps most) businesses encounter when they
have regularly recurring expenses but peaks and valleys in revenues which may
require the business to have a short term line of credit.
The New York Times has provided some answers to questions
people have about the U.S. debt and the debt ceiling. The Times article is here and well-worth
reading. http://www.nytimes.com/2011/07/28/us/politics/28default.html?pagewanted=all&_r=0
The Times article makes an number of important points, particularly
this one.
The debt ceiling “must be raised if the United States is to
pay for all the things that Congress has already bought: the spending in the
budget bills it has already passed, the Social Security checks promised to
retirees, the payments due to private companies with federal contracts and the
interest on bonds it has sold.” Let’s
say you run a business and you provide a service or sell a product to the
federal government. For example, you
manufacture firearms and have a contract with the federal government to provide
guns for U.S. Marshalls. You have
shipped the guns and are waiting on payment.
If the debt ceiling isn’t raised, you might not be paid on time. Not raising the debt ceiling doesn’t cancel
you contract or the obligation of the federal government to pay you for the
guns you have already supplied. Let’s
say you are a member of the military.
You are entitled to a paycheck.
However, if the debt ceiling isn’t raised, you may not get paid
on time. That is going to be tough on
your family. Suppose you are a doctor
and you accept Medicare patients. You
have treated a senior citizen on Medicare and sent the bill to Medicare. If the debt ceiling isn’t raised, Medicare
might not process your claim on time. You
are a student relying on a Pell grant.
If the debt ceiling, you might not get the funds you need to continue
your education or the funds might be delayed.
You own a government bond that is coming due. You are entitled to your principal and
interest for the loan you made to the federal government. You might not get what you are due or the
payments might be delayed. These are the
kinds of real world problems NOT RAISING the debt ceiling would cause. AND, NOT RAISING the debt ceiling would NOT
REDUCE the deficit by a dime.
What are the primary
causes of the federal deficit?
So, why has the deficit grown. The simple reason is Congress, particularly
Republicans in Congress who pushed through tax cuts that reduced federal
revenues far below the level needed to pay for programs and policies Congress
adopted, particular at the time when the U.S. was getting involved in two
expensive wars. This mistake led to more
serious deficits when a severe recession led to a significant drop in federal
revenues as people lost their jobs (so they no longer paid payroll taxes),
demanded increased social services like unemployment insurance and companies
cutback.
The Bush area tax cuts that reduced revenues coupled with increased
spending on social support programs such as unemployment insurance, food stamps
and people starting Social Security early because of the recession are the
primary reasons for increased deficits both now and in the future. Much of this spending on social support
programs automatically kicked in. For
example, when unemployment increases during a recession, more people apply for
things like unemployment insurance and food stamps and Medicaid. People who have reached retirement age who
might have continued working retire earlier than they would have during a
recession. The Obama stimulus
represents only a small share of the increase in debt and its impact on driving
up the deficit was temporary. Anyway,
the stimulus saved jobs and very likely helped to hold down spending since
people who would have otherwise lost their jobs due to the recession were able
to continue working. And, contrary to
what some Republicans argue the increase in the deficit has not been driven by runaway
spending. Federal spending increased
11.2% during Obama’s first term versus 33% in GW’s first term and 34% during
his second term. The increase during
Obama’s first term was driven primarily by things—such as increased demand for
unemployment insurance—over which the President and, even Congress, had little
control. The increases during GW’s first
and second terms were driven by tax cuts that went primarily to the rich and
wars that turned out to be unwise and unnecessary. Additionally, GW inherited a booming economy
and left one in shambles. Obama
inherited an economy on life support and by the end of his first term had
placed the economy on a trajectory of slow but sustained improvement. Additionally, he accomplished this in spite
of determined opposition from the Republican party whose members devoted
themselves to sustained obstruction even when the policies they were
obstructing were widely seen as beneficial and even necessary for rapid
economic recovery. Read more at these
links
http://www.marketwatch.com/story/obama-spending-binge-never-happened-2012-05-22
What future deficits
are we likely to see?
The Congressional Budget Office has issued revised
projections of the federal debt through 2023 which show that the deficit is
expected to remain about where it is now as a percentage of GDP at about 71.1%
of GDP compared to 72.5% this year.
Obviously, it would be better if the debt to GDP ratio returned to the
39% level we averaged over the last four decades. However, it is not horrible during this time
period given the fact that we have an aging population and Republicans refuse
to return to 1950s/1960s tax levels that would allow us to collect revenues we
badly need. I would note that if ALL of
the Bush tax cuts had been allowed to expire last January instead of just those
for the very rich, we could have brought federal debt down to as little as 52%
of GDP. As it stands now, with most of
the Bush tax cuts made permanent and without some kind of increase in revenues,
federal debt as a percent of GDP may start increasing rapidly after 2023
reaching perhaps 100% by 2034. And, NO,
we cannot bring that down through spending cuts alone. We need a combination of strategic spending
cuts, cuts that will have minimum impact on our ability to grow the economy and
the most vulnerable (children, the poor, the disabled, seniors, etc.), and
revenue increases that fall primarily on individuals and corporations that can
afford to pay a little more, segments of the economy that have benefited most
from Bush’s unwise tax cuts. All
Americans will have to experience some pain and inconvenience but it is doable
if we can have a rational discussion and bipartisan effort, neither of which
unfortunately are likely in the current political environment. Read more at these links:
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