Debt-ceiling economics and politics

Let me outsource this topic to some others who’ve said it better than I could.

Alan Blinder, professor of economics at Princeton University:

At current rates of spending and taxation, federal receipts cover less than 74% of federal outlays. So if the government hits the debt ceiling at full speed, total outlays– which includes everything from Social Security benefits to soldiers’ pay to interest on the national debt– will have to be trimmed by more than 26% immediately. That amounts to more than 6% of GDP, far more than the fiscal cliff we just avoided.

How in the world could the government cut so much spending so quickly? No one really knows. That is why you hear about dark scenarios wherein the U.S. defaults on the national debt, stops paying tax refunds, delays Social Security checks, leaves soldiers unpaid, and so on. Bad things will surely happen, one of which will be a swift descent into recession. Another will almost certainly be a second ratings downgrade and higher borrowing costs for years, maybe decades, to come.

Who knows what else? Use your imagination. Suppose we pay the bills for Social Security, Medicare, Medicaid, defense, and interest on the national debt in full. Then all other federal spending would have to fall by about three-quarters.

Keith Hennessey, who was Director of the White House National Economic Council under President George W. Bush:

Some conservatives argue for the passive variant of payment prioritization. Let’s vote against raising the debt limit, they argue. Let’s block any bill that increases the debt limit, they say. Treasury will soon run short of cash and have to make choices about where to spend.

Today President Obama signaled what he would do in this situation. He will start warning politically powerful constituencies: seniors, veterans, and troops, that they are at risk of not being paid on time, and their Republican Congressman is responsible for it, and his or her phone number is 225-XXXX. I have no idea why some conservatives think it’s smart strategy to hand the President this kind of political club.

And, via Berkeley Professor Brad DeLong, here is a statement with which 84% of economists polled agreed:

Because all federal spending and taxes must be approved by both houses of Congress and the executive branch, a separate debt ceiling that has to be increased periodically creates unneeded uncertainty and can potentially lead to worse fiscal outcomes.

The real purpose of the debt ceiling is political– it gives the minority party an opportunity to grandstand as if they’re somehow holding the line on the deficits that are the necessary mathematical result of previous spending and tax legislation. The political game is to force the majority party to push through the debt-ceiling increase and then try to embarrass them for their votes, relying on the stupidity of voters not to see the posturing for what it really is. But when different parties control the two houses of Congress, the only chumps in this game are the legislators who still try to play the same hand.

Nobody has a plan on the table to cut spending by 26%, so nobody has any legitimacy pretending they’re against an increase in borrowing. Congress needs to propose specific plans for spending and taxes and simultaneously authorize the borrowing that would be necessary to implement that legislation.

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29 thoughts on “Debt-ceiling economics and politics

  1. Steven Kopits

    Well, the debt ceiling doesn’t have to be all or nothing, no?
    But, if you’re going to play that game, you better have a pretty good idea of how it’s going to play out in terms of reduced expenditures. And you need to provide plenty of notice.

  2. Joseph

    “Nobody has a plan on the table to cut spending by 26%”
    I wouldn’t say nobody. Ricardo is going to do it by cutting NOAA.

  3. Bruce Carman

    The US gov’t has borrowed and spent $6.5 trillion since fiscal ’08 to keep nominal GDP from collapsing. The result has been an avg. rate of nominal GDP of 2% (largely in the form of reported price changes) vs. 6% long term (3% price effects), 5% since the ’80s, and 3.7% since ’00. Real GDP growth has been barely positive, and real GDP per capita is negative.
    http://research.stlouisfed.org/fredgraph.png?g=eCe
    Total local, state, and federal gov’t debt is approaching 100% of GDP and has grown 80% faster than GDP since ’01-’02 and 5 1/2 times faster since ’08; at these rates, the total gov’t debt to GDP will achieve an order of exponential magnitude of differential growth to GDP by as early as ’15-’16, requiring a super-exponential rate of growth of gov’t debt beyond the trend rate of 11-12% since ’08.
    But total gov’t debt to GDP has already achieved an order of exponential magnitude since the early ’80s, implying that gov’t spending can no longer grow as a share of GDP and population.
    Yet, without the trend rate of growth of total gov’t spending to GDP since ’01-’02, US GDP will decelerate further by 1.5% or more from the post-’08 trend of ~2.1%.
    Thus, we are facing higher taxes, including for Obummercare, fiscal constraints at all levels of gov’t (negative growth per capita), $1 trillion federal deficits, nominal GDP decelerating to around 0%, and ongoing contraction in real GDP per capita.
    The US faces a fiscal, financial, economic, social, and political crisis in the coming years not unlike that which occurred at the founding of the republic and during and after the Civil War.
    How anyone can closely examine the data and implications and not be alarmed speaks volumes about the quality of one’s pharmaceuticals or some other substances.
    Put another way, we as a nation and society face a full-blown bleeping disaster not unlike that which is occurring in southern Europe.
    Without a managed debt Jubilee and radical redefinition of the division of labor, work, purchasing power (vs. wage/salary income), money, equitable income distribution, “social welfare”, and the role, funding, and functioning of gov’t, we face a zombie apocalypse and collapse.
    “The market” as it has evolved since the onset of US deindustrialization is a cannibalistic zombie meat grinder, and the bottom 90% of US individuals and households are being lined up for processing.

  4. Bruce Hall

    It seems as if there are no economists working for the government who can devise a plan that manages spending in a way that does not either cripple the present or cripple the future.
    So far, there has only been a modest increase in future taxes for higher income individuals and a number of “stealth” taxes that will hit everyone. They are insufficient toward the goal of a more balanced fiscal activity. Everyone, including the CBO, admits that.
    We can attempt to go the route of Great Britain or France… much higher taxes… but there are economic consequences.
    The debt ceiling is certainly nothing more than a device that publicly highlights the issue or irresponsible spending. Without that device, what can you expect out of Washington? I submit that you can expect much more of what has occurred in the past few years with disastrous consequences. All politicians are loathe to raise taxes, but all politicians are eager to provide “investments in the economy.”
    Borrowing as a way of smoothing out the highs and lows of revenue is a device we all use. Borrowing as a way of perpetually funding our lifestyle is incomprehensible. Recently, the Fed has been the little mystery box that takes in debt and spits out cash. It belongs in a circus magic act.

  5. markg

    JDH,
    Treasury Securities are govt debt. These include US savings bonds. Every financial report I look at (mutual funds, stock qtrly reports, etc) list Treasury Securities as an asset. So using mathematical substitution everywhere I see the term “govt debt” I could replace with the term “private sector savings”. So what people are saying is we cannot raise the savings ceiling. Or we need to reduce savings in the future. We have way too much savings and it is bad for our future. We are killing our children and grandchildren with too much inheritance of our savings.
    I always thought savings was a good thing. Guess I was misled. You economist need to get your crap together and tell people about the evil of savings!

  6. Rodrigo

    @Bruce Hall

    Threatening to send the county into default to make a political point is certainly a way to publicly highlight some kind of irresponsibility. =/

  7. Philip Wallach

    Professor Hamilton,
    One small quibble. You say, “The real purpose of the debt ceiling is political.” But that’s giving those who use the debt ceiling as an opportunity to posture too much credit. The “real purpose” of the laws, when first enacted, was to move the authority to manage debt issuances from Congress to the Treasury. Legislators have figured out that this gives them a convenient opportunity for politics, but at no point did we collectively decide that it was reasonable to have a debt issuance process that provided this opportunity.

    And at this point, the rhetoric just rings awfully hollow. Debt ceiling antics always result in debt ceiling increases, without real signs of effective influence. The obvious implication is that advocates of spending restraint should spend their time and energy in some other way. I develop these arguments at length in my Brookings White Paper .

    Best,
    Philip

  8. 2slugbaits

    Bruce Hall They are insufficient toward the goal of a more balanced fiscal activity. Everyone, including the CBO, admits that.
    This has a ring of “truthiness” about it because it sounds like something that one of Krugman’s VSP types might say. But it’s not true. Looking out over the next decade it doesn’t require all that much effort to stabilize the debt-to-GDP ratio at today’s level of 73%. See:
    http://www.cbpp.org/cms/index.cfm?fa=view&id=3885
    The big problem is beyond the next decade; that’s when Medicare and Medicaid costs really bite. We need to fix healthcare because we can’t fix Medicare/Medicaid until and unless we first fix healthcare in general.
    We can attempt to go the route of Great Britain or France… much higher taxes… but there are economic consequences.
    So you would rather go the route of Greece; i.e., low tax revenues and severe austerity? You might want to look at the data. The countries that are surviving the Great Recession the best are precisely those with high tax rates and strong safety nets:
    http://notthetreasuryview.blogspot.com/2013/01/european-labour-markets-five-key.html
    All politicians are loathe to raise taxes, but all politicians are eager to provide “investments in the economy.”
    So did you write your congress critter demanding that he or she vote to raise your taxes? If you’re not part of the solution, then you’re part of the problem.

  9. CoRev

    2slugs arrive with his usual platitudes: “We need to fix healthcare because we can’t fix Medicare/Medicaid until and unless we first fix healthcare in general.” I thought that’s what you said Obamacare would do?
    He prefaced that comment with this: “The big problem is beyond the next decade; that’s when Medicare and Medicaid costs really bite.” 2slugs how many times do we fiscal conservatives have to repeat that message before it is acceptable to liberals/Democrats? Budgets been proposed, campaigns run, and elections have been won and lost on trying to address that single issue, and every time the Republicans/fiscal conservatives make a proposal it demagoqued to death.
    Accordingly, every time we have leverage in the House the make another run. You and yours start the demagoquing, character assassinations, and stone walling. How long since the Democratically controlled Senate has passed a budget? They know if the pass one it will be another avenue to try, even again, to get some attention on the real issue: “The big problem is beyond the next decade; that’s when Medicare and Medicaid costs really bite.”
    So is it any wonder that the issue keeps being addressed and then ignored? Winning elections have consequences too, and being a leader is just one of them.

  10. Ben Wheeler

    The constitution vests in Congress power
    To tax and spend as well as issue debt.
    Strong limits on the Treasury are set
    Which now are binding. Rapidly the hour
    Approaches when all three constraints will leave
    No easy way for Geithner to comply.
    Will Congress let the debt ceiling defy
    Its spending orders, or grant a reprieve?
    If Congress does not act, will Treasury
    Allow the country’s bills to go unpaid?
    Will fire sales raise the funds Congress enjoins
    The Treasury to spend, or will we see
    Appropriated monies be delayed?
    Will Geithner mint some trillion dollar coins?

  11. 2slugbaits

    CoRev 2slugs how many times do we fiscal conservatives have to repeat that message before it is acceptable to liberals/Democrats?
    This is rich coming from the guy who waved the bloody shirt about the $716B in Medicare cuts under Obamacare. No one on this blog was more hysterical about those cuts to Medicare than you were; but here you are pretending to want cuts to those programs. You win the hypocrite of the year award.
    I thought that’s what you said Obamacare would do?
    Then you thought wrong. Obamacare was a necessary but hardly a sufficient condition for getting healthcare costs under control. No one ever said that it would fix the problem. It helps and it’s a step in the right direction, but not a cure all.
    Republicans/fiscal conservatives make a proposal it demagoqued to death.
    Well, excuse me but Obamacare started out as a Republican proposed alternative to Hillarycare back in the 90s. So I think it’s a little hard to claim that the Democrats won’t take GOP ideas seriously. On the other hand, the Ryan proposals were not serious. Any plan that relies upon several magic asterisks is a fraud. There’s a difference between pretending to make a proposal and actually making a serious proposal. For example, Sen. Coburn did make some constructive proposals during the Obamacare debate. Obama, Reid and Pelosi even agreed with some of his proposals and wanted to include them in the bill. But Sen. McConnell went through the roof and ordered Coburn to sit down and shut up because the GOP did not want anything added to the bill that might make it better. McConnell’s goal was to kill Obamacare, not make it better. So when you talk about demogoguing proposals, I assume you have Sen. McConnell in mind. Or Sen. Grassley who was caught on video bragging to his supporters about how he cleverly lied to Obama during the negotiations. Are those the kinds of constructive proposals you had in mind?
    Given the snakes in the grass like McConnell and Grassley, not to mention the brain dead Tea Party types like Michele Bachmann and Louie Gohmert is it any wonder that Sen. Reid doesn’t want to waste his time debating a pointless budget?

  12. Bruce Hall

    2slug:
    A private economist [corporate] says the following:
    “Today we don’t have fiscal sustainability,” said Ellen Hughes-Cromwick, chief economist at Ford. Failure to fix America’s long-term debt problem “will generate a very weak period of economic growth.”
    Do you find fault with that?

  13. Bruce Hall

    2slug says: “So did you write your congress critter demanding that he or she vote to raise your taxes? If you’re not part of the solution, then you’re part of the problem.”
    Of course, that was purely tongue-in-cheek as evidenced by the link he offered where the solution was: “Policymakers can achieve the $1.4 trillion with $1.2 trillion in policy savings — tax increases and spending cuts — because that would generate almost $200 billion in savings in interest payments. That $1.4 trillion in deficit savings would stabilize the debt at about 73 percent of Gross Domestic Product (GDP) over the latter part of the decade (see Figure 1).[1]
    That $1.4 trillion — and not a larger amount — would stabilize the debt is due primarily to the deficit-reduction policies that the President and Congress have enacted over the last two years. First came $1.5 trillion in appropriations cuts (and another $200 billion in associated interest savings), primarily through the annual caps in the 2011 Budget Control Act (BCA).[2] Second came the tax increases in the fiscal cliff deal, officially called the American Taxpayer Relief Act (ATRA).”
    Actually, that was tongue-in-cheek, too. There really are no $1.5 trillion in appropriation cuts [conveniently sidesteped] to offset a continuing annual $1.4 trillion deficit. So, one has to conclude that the plan is a significant hike in taxes… or that the real plan is to ignore the issue altogether and it’s BAU.
    But, as written months ago in Econbrowser, the real answer is a targeted inflation rate of, what, roughly 8-10%? That handles the debt… except for the interest payments, of course.

  14. ppcm

    When it comes to the human’s behaviour and memory it is not the combination of both that matters, but when and how debts will or will not be repaid.
    All issues and alternatives have their answers so one should not be shy to repeat search from history.
    « New direction in the relationship of between public and private debts » B. friedman
    “This unusual set of developments raises scientific questions as well as question
    s of public policy. The most widely discussed issue at the policy level has been the concern that so large a federal deficit, persisting even a near—full employment, is impairing the economy’s long—run growth and competitiveness by absorbing so much saving as to “crowd out” investment in productive new plant and equipment”
    Cicerone
    « As for property, it is a duty to make money, but to finance it only by honourable means; it is a duty also to save it and increase it by care and thrift.
    These principles Xenophon,a pupil of Socrates, has set forth most happily in his book entitled Oeconomicus.”
    When I was about your present age, I translated it from the Greek into Latin. «
    BOOK II. XXV
    « famous saying of old Cato’s : when he was asked
    what was the most profitable feature of an estate^ he replied : Raising cattle successfully.” What next to that? Raising cattle with fair success.” And next? Raising cattle with but slight success.” And fourth? Raising crops.” And when his questioner said, How about money-lending ? ” Cato replied: How about murder?”

  15. Steven Kopits

    The real purpose of the debt ceiling is political– it gives the minority party an opportunity to grandstand as if they’re somehow holding the line on the deficits that are the necessary mathematical result of previous spending and tax legislation.
    I disagree with this statement, in the sense that I think borrowing represents a non-market failure in a democracy. I, as a voter and taxpayer, have no real sense of how much government debt is being accrued on my account and how that will affect any current stream of benefits I or others may receive.
    The Krugmanites are entirely correct to say that money, today, is free. Interest rates are minimal and the Fed appears able to inject liquidity into the economy without creating inflation. Thus, the voter can easily fall under the impression that all is well, and that any problems coming down the road will be someone else’s.
    Thus, there is no short term check on the third leg of the stool. Taxes and spending relate directly and immediately to the electorate. Debt does not, and I would argue that this then is a structural weakness of democracies–a non-market failure. We see a deficit bias in most democracies for just this reason: Politicians can use debt (deferred pain) to buy votes in the short term.
    The question is how to compensate for this structural weakness. A debt ceiling is one tool. A balanced budget amendment is another. The direct allocation of debt to taxpayers (eg, as personal unsecured liabilities) is another. And of course, performance incentives for politicians is still yet another tool. But if you don’t have some sort of tool, then you risk perpetually high deficits.
    Let’s be honest. If the President were responsible on the deficit, he would not have extended the Bush tax cuts in perpetuity for all but the $400k+ class. He himself endorsed a low revenue scheme–exactly the sort of non-market failure to which I allude.
    So there are plenty of tools which we could envisage. But I think we need to acknowledge that democracies tend to have a deficit bias because voters do not sufficiently incur the costs of increased debt in the short run.

  16. tj

    2slugs
    Is it too late to nominate your progressive leader for your “hypocrite of the year award”?
    “The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. government can’t pay its own bills. … I therefore intend to oppose the effort to increase America’s debt limit.”
    — Then-Sen. Barack Obama, floor speech in the Senate, March 16, 2006
    http://www.washingtonpost.com/blogs/fact-checker/post/annotating-obamas-2006-speech-against-boosting-the-debt-limit/2013/01/14/aa8cf8c4-5e9b-11e2-9940-6fc488f3fecd_blog.html
    Candidate Obama: “The problem is, is that the way Bush has done it over the last eight years is to take out a credit card from the Bank of China in the name of our children, driving up our national debt from $5 trillion for the first 42 presidents – #43 added $4 trillion by his lonesome, so that we now have over $9 trillion of debt that we are going to have to pay back — $30,000 for every man, woman and child. That’s irresponsible. It’s unpatriotic.” (July 3, 2008)
    http://www.realclearpolitics.com/video/2011/08/24/flashback_obama_adding_4_trillion_to_debt_is_unpatriotic.html

  17. kharris

    What Phillip Wallach said.
    “Real” is a spongy word, with lots of connotation but no precision, and does as much to get us off track as to enlighten. The debt limit was a simplification when it was first introduced. Is the “real” purpose not the intended purpose of simplification? The political use to which the limit is being put is harmful, yes, but is politics the only “real” thing these days?

  18. Rich Berger

    In FY 2007 we spent $2.564T in constant 2005 dollars. In FY12 we spent roughly $3.2T. The idea that we can’t cut spending at least halfway back to 2007 levels is BS. The failed stimulus is over and I thought we were winding down the wars. Obama and the Dems do not want to cut spending (and apparently they found out that most of those Bush tax cuts went to the non-rich, ha).

  19. fladem

    That Keith Hennessey is cited for anything is proof that there are little consequences within the accounting profession for being completely wrong.
    While working for Bush, Hennessey actually attacked Obama in 2007 when Obama suggested that there was an emerging crisis.
    After having been completely wrong, and having failed to warn his President of the coming financial crisis, he then participates in the inquiry into the causes of the financial crisis – and blames the government!!!
    He should be hanging his head in shame. He messed up on a grand scale.
    And yet he is actually treated seriously.
    If was had a real job and screwed up he would be one of the member of the long term unemployed.

  20. Rich Berger

    In Keith Hennessey’s defense, he held an optimistic view in 2007. He did not expect an Obama presidency, let alone a two term one.

  21. Menzie Chinn

    Rich Berger: Continuing your campaign of disinformation, I see. Didn’t the recession begin in December 2007, more than a year before the Obama Administration begin. Or do you have your own set of facts?

  22. kharris

    The “failed stimulus”? See, that kinda insupportable nonsense gives your game away, Rich. If you don’t care for the majority view among professional economists – which is that the stimulus did stimulate – then you can look for yourself. Compare the pattern of outlays from ARRA with the pattern of GDP and employment. When ARRA outlays are large, GDP turns around and employment follows soon after.
    I realize that when you write “failed stimulus” you think “failedstimulus” as one word, a sort of shibboleth, a verbal fashion statement for your political tribe. That makes it harder for you to adapt to reality. Let me assure you that in terms of verbal fashion, the whole “failed stimulus” thing is so two elections ago, as well as being untrue.

  23. Rich Berger

    Sure looks like a failure to me. I know, there are always excuses: it was worse than we thought, the stimulus was too small, usw. Being a Keynesian means never having to say you’ve been wrong. Sort of a foolproof methodology.
    I am sure that I have worn out my welcome, so I’ll just say auf wiedersehen, gentlemen (I don’t think there are any ladies here).

  24. 2slugbaits

    Bruce Hall
    “Today we don’t have fiscal sustainability,” said Ellen Hughes-Cromwick, chief economist at Ford. Failure to fix America’s long-term debt problem “will generate a very weak period of economic growth.”
    Do you find fault with that?
    The key word is “long-term.” “Long-term” does not mean the current year. It does not mean next year. It doesn’t even mean the next ten years. “Long-term” generally means something close to a generation.
    Over the short-run we should ignore the debt and deficit. Over the medium-run (~5-10 years) we should try to stablize the debt-to-GDP ratio. Over the long-term we need to get to some kind of fiscal balance. Almost all of the long-term fiscal imbalance is due to rising Medicare/Medicaid costs. Those outyear Medicare/Medicaid costs are due to two things:
    (1) growing healthcare costs in general; and (2) demographics. There’s not a lot you can do about the second factor, and cutting Medicare/Medicaid without addressing healthcare costs overall just shifts costs around from one component of GDP to another component. The reason we should worry about outyear Medicare/Medicaid costs isn’t just the welfare distortions due to higher taxes, but also because we really don’t want to be spending that much of GDP on a healthcare system that delivers such crappy performance.

  25. 2slugbaits

    Steven Kopits
    I would argue that this then is a structural weakness of democracies–a non-market failure. We see a deficit bias in most democracies for just this reason: Politicians can use debt (deferred pain) to buy votes in the short term.
    I take it that this is in memorial of Prof. James Buchanan
    http://en.wikipedia.org/wiki/James_M._Buchanan
    There’s actually a lot of interesting (and conflicting) empirical stuff on the “deficit bias” theory. Romer’s Advanced Macroeconomics has a nice survey of the literature.
    If the President were responsible on the deficit, he would not have extended the Bush tax cuts in perpetuity for all but the $400k+ class.
    I agree with a lot of this. Obama was right to not want to increase taxes on the bottom 98% right now, but once the economy gets fully back on its feet we should revisit the tax rates. Obama never should have promised to make the current rates permanent. Big mistake and a promise that he will have to break sooner or later. Another round of higher taxes on the rich and some tax increases on the middle class. I’m not married to the idea of higher income taxes on the middle class (e.g., a 2% VAT and various user fees might be good alternatives), but we will need revenue from further down the economic ladder.

  26. Ricardo

    Professor,
    There is always an underlying assumption by people who make these kinds of claims and that is that the government can do it better and cheaper than the private sector. The only problem is that is a lie.
    A related assumption is that if the government doesn’t do it, it won’t be done. That is also a lie.
    Government doesn’t create services. Government appropriates services from the private sector. Let me use an example. At one time non-profit organizations raised money by entering into recycling campaigns: news paper drives, bottle collections, plastic collection, etc. Governments saw the money being made and appropriated the recycling so that all recycling goes through municipalities. Not only that, where recycling businesses were paying non-profits, most municipalities today are paying the recyclers from increased taxes.
    No one would have the nerve to suggest that a municipality stop recycling. The media and politicians would bury them in claims that such a person wants trash and garbage in the streets. In truth recycling has become a racket run for the benefit of the politically connected. So these articles are not so much economic analysis as they are political justifications of wealth destruction.

  27. Matt Young

    The real reason for the debt ceiling is the lack of democracy in the Senate where some 40% of the citizens get about 1/4 the vote they should. Without democracy, unrestrained spending by oligarchs is dangerous.

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