The Deal with the Debt Limit

In the last few weeks, Americans have been frustrated with the inability of Congress to deal with the debt limit.  The House of Representatives, led by the Republicans, cannot come to an agreement with the Senate or the President, both led by Democrats.  Many people have begun to pull their hair out, not understanding why the politicians can’t get their act together.  The debt limit deal may seem simple on its face, but it’s complicated by both economic and political differences in which both sides have been steeped.

debt-ceiling

The Problem Defined

Since the last term of President George W. Bush, here are the deficits in the United States federal budget:

2005: $319 billion
2006:
$248 billion
2007
: $163 billion
2008: $438 billion
2009: $1.4 trillion
2010: $1.3 trillion
2011: $1.48 trillion (estimated)
2012: $1.10 trillion (estimated)

If we stay on our current track for the next 10 years, we will have to borrow around $12 trillion in order to fund our government.  Set aside, for the moment, that this almost doubles the current amount of our entire debt as a nation (and how ridiculous that is), and the precipitous increase in deficit spending beginning in 2010.

We need to find a way to pay for our future government.  This is the problem that Congress is currently negotiating.  It’s a $12 trillion problem.  At most, the parties are $12 trillion apart.  Right now, there’s talk about $4 trillion in spending cuts, and a couple trillion (maybe) of tax increases, which would leave us borrowing more than half of this $12 trillion over the next 10 years.

Possible Solutions

There are three ways to deal with this problem.  Any possible solution that Congress comes up with will use at least one of these three methods:

  • Increase the debt limit – this is how Congress has traditionally dealt with this issue; they just raise the debt limit, and everyone goes back to their spending addiction.
  • Decrease spending – We could, theoretically, decide to spend $12 trillion less than we planned to spend over the next 10 years, and we wouldn’t have to raise the debt limit OR raise taxes.
  • Increase taxes – or “close tax loopholes,” or “decrease tax expenditures,” or “increase revenues,” or “increase fees,” or whatever else you want to call it (Governor Quinn of Illinois likes to call these “surcharges”).

So, there are an almost-unlimited number of scenarios that would solve the problem.  Here’s just a few to make the point:

  • Increase taxes by $2 trillion, decrease spending by $6 trillion (3:1 ratio), and increase the debt ceiling by $4 trillion.
  • Increase taxes by $1 trillion, decrease spending by $6 trillion (6:1 ratio), and increase the debt ceiling by $5 trillion.
  • Increase taxes by $6 trillion, decrease spending by $6 trillion (1:1 ratio), and no debt increase needed.
  • Increase taxes by $12 trillion, no spending decrease needed, no debt limit increase needed.
  • Decrease taxes by $12 trillion, no new taxes needed, and no debt limit increase needed.
  • Increase the debt limit by $12 trillion, no new taxes needed, and no spending cuts needed.

Again, there are unlimited scenarios to solve the problem, and it’s only a $12 trillion math problem.  However, the major snags to a compromise are not mathematical, but political and economic.

Political and Economic Snags

Liberal economists believe that spending by the government helps the economy; they believe that the more the government stimulates, the more the economy will turn around.  This economic philosophy has been trumpeted again and again in the New York Times by columnist Paul Krugman who says that the last stimulus that the government passed was unsuccessful only because it didn’t spend enough.  So, in their mind, if we were to take on more debt as a nation, and spend it, we would be better off than cutting our spending.

Conservative economists, on the other hand, believe that spending by the government doesn’t stimulate the economy; or, at least, it doesn’t stimulate it as much as other forms of spending.  They believe that government should free up companies to spend on their own, create jobs on their own, and produce profit and capital on their own, instead of the government trying to do it for them.  They believe that the most efficient form of job creation is in the private sector.  They also think that increasing taxes on people in a recession is a bad thing for the economy (a sentiment that President Obama, at least rhetorically, agrees with).

There are political considerations to be made as well.  In 1990, we had a similar debt/deficit crisis.  We had a budget that had a $64 billion deficit (that seems really small to us today, doesn’t it?).  President George H.W. Bush made a compromise with the Democrat-controlled Congress to make $165 billion in new immediate taxes, in order to ensure that spending would be cut down the road.

There are two problems with increasing taxes:

  1. Once raised, they never come back down.
  2. Tax increases are immediate, while spending decreases are spread out over years.

After the 1990 deal, the budget deficit jumped to $269 billion in 1991.  The deal stipulated that $324 billion would be cut from the federal budget from 1991 to 1995.  Instead, federal spending increased by $500 billion.  So much for those “planned” spending cuts!  Oh, and in the 1992 election, the Democrats used the tax increases to crucify President George H.W. Bush at the polls.

This is the same thing that’s happening today, and it’s one of the reasons why congressional Republicans are so wary of a compromise that includes increasing taxes; they just don’t feel like they can trust the Democrats to follow through with the promised spending cuts.  Can you blame them?

The Negotiating Camps

So, far from being an easy compromise, today’s debt ceiling fight is really a fight over three very basic political and economic questions:

  1. How big should government be?
  2. Can government spending stimulate the economy?
  3. If you cut government spending, does that hurt the economy?

We have four basic camps in the debt ceiling negotiations today:

  • The Republican Party – they believe that government should be smaller, they like government spending, but not as much as the Democrats, they’re wary about making huge cuts to government, and they feel like they can’t trust the Democrats to follow through with spending cuts (the whole “fool me once, shame on you; fool me twice, shame on me” thing).
  • The Tea Party – they believe that government should be small, that government spending doesn’t do any good for the economy, and that we can safely cut government spending, and the private sector will pick up the slack.
  • The Democrat Party – they believe that government should be bigger, they love government spending and think it’s a stimulus to the economy, they loath making cuts to government, and aren’t too worried about increasing the government debt.  This is evidenced by the president’s earlier plea for a “clean debt limit increase.”
  • Mitch McConnell – the Senate Republican leader would prefer that Congress not have to deal with this, and would allow President Obama to increase the debt limit unilaterally three times.  His reasoning is that this would give the president enough rope with which to hang himself.  I guess President Obama would increase the debt, people would see how bad that was, and put him out of office?  Maybe it would hasten our economic path toward Greece. Yes, yes, I know; “Mitch McConnell” isn’t so much a “camp” as a person, but there’s quite a few media types backing this plan, so I thought I’d include it.

Questions: How would YOU solve the debt limit crisis?  What would your plan look like?  Do you identify with any of the four groups listed above?  You can leave your comments by clicking here.

  • Pious_Ted

    Robert,

    I am curious where you got your annual federal budget deficit data from 2007 – 2010.  I don’t believe all those numbers are correct.  For example, the federal budget deficit in 2009 was much larger than $407 Billion.

    • http://bobewoldt.com Robert Ewoldt

      You’re right; I was using the estimated numbers from the originally
      submitted budget, not the final, actual numbers. I’ve corrected it, and
      expanded it to include all of Bush’s final term (to be fair).

    • http://bobewoldt.com Robert Ewoldt

      Now, I’ve used different media artcles (primarily Bloomberg and the WSJ) to
      get my numbers, and confirmed them with two sources. Thanks for the catch.

      • Pious_Ted

        You are welcome.  Interesting article you wrote.  It is alarming that our leaders can not manage our financial affairs any better than this.  Republicans and Democrats alike share the blame.

        • http://bobewoldt.com Robert Ewoldt

          Agreed.

  • http://pulse.yahoo.com/_VTZGDYKWSASGK72V77U6U3ZX5M Dale

    Interesting that no one seems to discuss the fact that any plan to increase the debt ceiling is, in essence, “doing evil that good may come” which is inherently immoral.  Is everyone merely a pragmatist?

    • http://bobewoldt.com Robert Ewoldt

      This statement is true if you believe that debt is evil.  I’m not sure that debt is “evil,” though a very good case can be made that debt is bad/unhelpful from any number of standpoints.

  • http://brocmiddleton.blogspot.com/ Broc Middleteon

    Let me start with the obvious, any debt deal will have to be
    bipartisan.  Not only so the congress
    could have any chance of passing it but also so the public will accept it (Note
    the drama around “Obamacare”). 

     

    So step one of this bipartisan deal will have to get
    Republicans to put taxes on the table and Democrats to put entitlements on the
    table.  These two issues are the “sacred
    cows” of each other parties and both will be require change to truly solve our nation’s
    debt problem.

    Spending cuts/Entitlement reform – The problem here is
    making significant savings without significantly reducing assistance to current
    seniors. Bob’s second point about tax increases being immediate and spending
    cuts being delayed is true (the first statement about taxes not so much but I
    will get to that later) Pulling out a major social safety net now from under
    the feet of our current seniors is not an option, So while minor changes can be
    made now, the structural entitlement reform can be laid out and even agreed to
    but should not be implemented until the public has time to adjust any
    saving/retirement plans.  This cut off
    could be anywhere from current 40-50 year olds. 
    Now what changes could affect the now 40-50 year olds? A raise in the
    retirement age, reduced assistance, caps place on wealthier individuals who do
    not “need” the assistance program as much.  The bottom line is the old days of being able
    to retire on your social security checks are over. I know some will say that
    was over a while ago with inflation, but with people living longer that means
    benefits will have to change in order to save these programs. Due to changes in
    entitlement reform, in the future, you  will have to save more money and work longer
    before we are able to retire.  Now as far
    as the other spending cuts go, it should be across the board nothing can be
    continue to increase spending, including defense, now if some programs only get
    a freeze in pay that is fine but the freeze should continue for as long as the
    deal is in place. 

     Tax rates and loop wholes – Bob I have to take issue with
    one of your “problems” with increasing taxes, you say once raises “they never
    come back down” this is not only incorrect its actually the exact opposite of
    tax rate trends of the last 75-80 years. 
    Tax rates are at historic lows now…we can debate the competitiveness of
    those rates in a global economy or tax rate versus what people/business
    actually pay or whether taxes kill jobs, blah blah blah but simply put your
    statement regarding ‘tax increases” is simply not true. Now to the bipartisan
    deal Tax loop holes have to go, subsidies for corn and oil companies are gone,
    actually most tax loop wholes should be gone barring a few (i.e. home
    ownership, marriage, kids).  However the
    point is the government must have an overall increase in tax revenue.  Now to offset this seemingly “unfair” deal of
    getting increased taxes now and spending cuts later…Why not agree to close tax
    loop holes to increase revenue now, but do not increase tax rates on the
    wealthy until the entitlement reform can be implemented?  That way the government gets more money now,
    entitlement reform and taxes are agreed to but won’t happen till later on down
    the road, business have the stability it needs to invest and grow because they
    know what is coming down the road…everybody happy yet??…to be continued….

    • http://brocmiddleton.blogspot.com/ Broc Middleton

      ….continued…..

      Green projects – While President Obama has already started a
      program which retrofits seven agencies federal buildings with more energy efficient
      technology this need to be expanded nationwide. 
      These projects will put people back to work and lower the governments
      need for fossil fuels because its buildings will be more efficient.  The more we can rely on renewable green
      energies the more independence we will achieve from foreign oil.  Everyone happy right???

      Other Energies – Now green technology is great and all, but
      it simply is not ready to take over the energy demand of our nation…not even
      close.  So more change is needed.  Every DOMESTIC energy option out there should
      viewed as viable in some way to help the nation get off of foreign oil.  Drill baby drill Republicans and Democrats
      have been fighting over drill spot and regulation for years, Give the
      government its oversight and open up everywhere to drilling.  We need to produce MORE domestic oil.  Another option is the T. Boone Pickens Plan,
      if you don’t know who he is Google him.  He
      has a plan to convert America’s 18 Wheeler truck and bus fleet to run on
      Natural gas.  Natural gas is a resource
      we have a lot of and with the expanded “fraking” to find more natural gas it’s
      not something we are likly to run out of anytime soon.  Bottom lines…import less, use more domestic
      energy and save a truck load of money. Everyone happy right???

      Tariffs – I support an increase of our tariffs for a lot of
      reasons (which you can read about in my blog, http://brocmiddleton.blogspot.com/2011/07/tariffs-protection-or-hindrance.html
      ).  The push for free trade has seen our
      money, jobs, and manufacturing head out of our country…why, because it’s
      cheaper to make stuff in countries that don’t have laws about safe working
      conditions, environmental laws, and a minimum wage.  Free trade is great in theory because if
      fosters competiveness and innovation, however free trade assumes a level
      playing field which for the reason I just listed we do not have a level global business
      market.  So to protect our country from
      businesses that may choose to outsource, an increased tax of imports would be
      good.  It would lead to increased
      revenues into the federal government and overall encourage American made
      products for Americans by Americans…sounds good to me…Everyone happy right???

      Lastly I wanted to throw a crazy idea out into the world and
      see how people responded.  What would you
      say to a mandatory 16 hours per week (two 8 hour work days’ worth) of community
      service for people who are receiving unemployment insurance?  I hear all the time how national and state
      parks are in need of repair, homeless shelters need help, food banks need help,
      etc.  Why not say if you want unemployment
      insurance you have to give back 16 hours per week of community service?  If you don’t want to do the work than you don’t
      get unemployment insurance…obviously medical conditions would prevent some people
      from participating but overall what do you think?

       

      • http://bobewoldt.com Robert Ewoldt

        Green Projects: I suppose these are OK, as long as there’s a clear benefit for the cost that we’re putting out.  I think a lot of these “green projects” are done because of ideology, not necessarily because they need to be done or because we’ll be saving a bunch of money because of them.  If we retrofit a government building at a cost of $2M, how long will it take to recoup that cost in savings?  Probably over 50 years.

        Other Energy Initiatives: I agree with you on this one.  Our goal should be to decrease our dependence on foreign energy sources, and we shouldn’t be throwing out a certain type of energy development.  Having said that, I don’t think that government should necessarily be investing heavily in this area.  The market can drive these initiatives (for the most part).

        Tariffs: I disagree with you on this item.  I read your article on tariffs, and agree with your statement that tariffs could create new jobs in the U.S.  However, I agree with Phil Holden, whose video you cited, who said that tariffs can cause more harm than good in a country.  Not only do you lose growth overall, but consumers pay a higher price for the goods with tariffs on them, and you create incentives for retaliatory tariffs.  I’m not convinced that tariffs would actually help our economy.

        Crazy idea: I’m OK with this idea.  I’m not a huge fan of long-term unemployment insurance, but I understand that we should help those in need in our country.  If we can get them to contribute to the community while they’re on unemployment, that would be nice, but I wonder if it would actually contribute that much to our economy.  Think about it… you’re basically saying to communities, “Hey, here’s a bunch of people who are probably depressed (because they’re unemployed) and are forced to work for their community doing something for 16 hours per week.  What do you want them to do?”  These people will probably be doing menial tasks, and not contributing a HUGE amount to the community economy.

    • http://bobewoldt.com Robert Ewoldt

      OK, I probably shouldn’t have used the word “never” in my statement (those absolute words get me into trouble).  However, under Democrat presidents, it’s unlikely to happen.  Over the last 100 years, 73% of the top tax rate increases have come under a Democrat president, and only 27% of the top tax rate decreases.  So, it’s three times more likely that we’ll get a tax increase from a Democrat president than a tax decrease.
       
      Taxes began the 20th century at a top marginal rate of 7%, and have never come back down to that level, so technically, my statement was correct (though you are correct in your overall criticism of my statement).  Also, tax rates are not at historic lows, given that.  Currently, our lowest marginal tax rate is 10%, and our highest is 35%, so our lowest tax rate is higher today than our highest tax rate 100 years ago.
       
      Here’s the problems that I identified:
      1. Republicans believe that government should be smaller; that’s why they don’t want tax increases.
      2. Republicans have been burned before by Democrats on tax increases.
      3. Tax increases aren’t absolutely necessary as part of the debt limit deal.  We could do a combination of spending cuts and debt increase, and everyone would be happy.  This notion that “we must increases taxes to make this deal” is untrue.

      On a slightly related note, watch this video about the growth-maximizing level of government… very interesting: http://www.youtube.com/watch?v=uj6lRFXC5rA

      Lastly, I would agree with you about tax loopholes; they are unproductive from an economic standpoint.  However, I believe that if you do away with the tax loopholes, you should decrease the marginal tax rates as well; the reason for this being that tax loopholes are good for a select few, while lowering the marginal tax rates are good for everyone.  Instead of giving favors to special interest companies/industries, everyone will benefit from the lower rates (small businesses, job creators, etc.).

      Unless, of course, your goal is to increase the size of government, instead of creating jobs.  If that’s the case, then you could just close the loopholes, to increase government revenues, and pay for your pet projects.

      • http://brocmiddleton.blogspot.com/ Broc Middleton

        Green Project – Making Federal building more energy efficient would not only be good for energy consumption but also create jobs.  Secondly Republicans are pushing for many federal building to be sold off to help lower cost, it much easier to sell a building in today’s economy if that building in question in energy efficient.

        Other Energy issues – I think that with the lack of movement American society is getting in energy independence it is becoming more and more “necessary” for government to at least get the ball going in the right direction.

        Tariffs – Yes you man lose OVERALL growth, compare to a scenario with no tariff, but you will see growth in American business, decrease in imported goods, and an increase in domestic production those are things for the specific situation America has found itself in.  We do not have problems with supply; the problem is too much of our supply is imported.  Tariffs are a tool we can use to lower imports, increase domestic supply, and it doesn’t cost us money it actually produces revenues for the government in contrast to your “incentives” which would cost the government more money we don’t have.

        Crazy Idea – I am sure a lot of programs could use extra hands…even disgruntled hands who may not “want” to be helping.  We are paying unemployed people already, lets at least get something more for our dollars spent. 
         
        “…However, under Democrat presidents, it’s unlikely to happen.  Over the last 100 years, 73% of the top tax rate increases have come under a Democrat president, and only 27% of the top tax rate decreases.  So, it’s three times more likely that we’ll get a tax increase from a Democrat president than a tax decrease…”

        I see qualifying statements here that were not there in the original post.  So what about tax rates under Republican Presidents? I am pretty sure the odds of tax rates going down under a Republican President have to be pretty good, do I need to remind you that we HAD a balanced budget With a Republican Congress and Democratic President but Bush screwed our economic utopia with tax cuts we couldn’t afford and 2 wars, 1 on which was with cause (Afghanistan) and 1 was not (Iraq). 
        I had a laugh at your manipulation of the facts regarding tax rates. Yes as of exactly 100 years ago (1911) our tax rates are higher, but what happened say 10 years after that…Around WW I, to actually pay for the war tax rates were raised to 77%, then when the war was over taxes came back down to around 20-25% What happened during WW II?  To actually pay for the war tax rates were raised again this time to 91% were it stayed until 1964 when taxes were cut back down to 77% and then 70% then cut again in 1982 to 50%, in 1987 cut again to 38.5%, and again in 1988 to 33%, cut AGAIN in 1992 to 31%, then with Clinton in 1993(and ZERO Republican votes) tax rates were raised to 39.5%. There tax rates stayed until 2000 when Clinton left office and handed G.W. Bush what I believe was over a $100B surplus.  2001 tax rates were cut to 35% where they have stayed until present.  With all that said, I would say the trend is taxes are being cut more often than they are being raised. 

        Problems that you identified:
        1&3. Yes you are right that is the problem, Republican want to make government smaller.  They want to force that smaller government by cutting off the ecomonic support for government programs.  Republican’s first goal is NOT debt reduction. Republican’s goal is to shrink government.  That is why whenever you hear Republicans, including you,  talking about closing loop holes they always follow that line with “that will allow us to lower tax rates”.  What that does is create a zero sum total.  The government does need more revenue as you said even if we cut all the spending in the Paul Ryan plan (estimated around $6.2T which is dramatic and would adversely affect the social safety net) we would still be borrowing another $5.8T how is that not a situation where an increase in revenue is needed? 

  • Rayskidude

    Green Projects – can you name one green energy that has clear documentation of actually saving money over previous energy sources, and with a net increase in jobs?  Obama shuts down oil drilling in the Gulf of Mexico and uses the EPA as his surrogate to shut down coal-fired plants across the USA – thus killing multiplied thousands of jobs!!  Is this the laser-focus on jobs that Obama promised?

    Repeal Sarbanes-Oxley and Frank-Dodd financial regulations.  These laws offer little protection compared to the commercial uncertainty generated and the number of jobs killed.  Repeal ObamaCare – the CBO says that medical costs will rise by $120billion over 10 years – after Obama promised this would decrease costs.

    Go to ‘zero-based’ budgeting – get away from baseline budgeting passed by Democrat legislators and signed by Nixon.  Baseline budgeting only leads to further deficits.

    There is so much wrong in Washington – I truly wonder whether it is now beyond repair.