What’s a Debt Limit?

From Marketplace, an interview with Ben Carson:

Ryssdal: All right, so let’s talk about debt then and the budget. As you know, Treasury Secretary Lew has come out in the last couple of days and said, “We’re gonna run out of money, we’re gonna run out of borrowing authority, on the fifth of November.” Should the Congress then and the president not raise the debt limit? Should we default on our debt?

Carson: Let me put it this way: if I were the president, I would not sign an increased budget. Absolutely would not do it. They would have to find a place to cut.

Ryssdal: To be clear, it’s increasing the debt limit, not the budget, but I want to make sure I understand you. You’d let the United States default rather than raise the debt limit.

Carson: No, I would provide the kind of leadership that says, “Get on the stick guys, and stop messing around, and cut where you need to cut, because we’re not raising any spending limits, period.”

Ryssdal: I’m gonna try one more time, sir. This is debt that’s already obligated. Would you not favor increasing the debt limit to pay the debts already incurred?

Carson: What I’m saying is what we have to do is restructure the way that we create debt. I mean if we continue along this, where does it stop? It never stops. You’re always gonna ask the same question every year. And we’re just gonna keep going down that pathway. That’s one of the things I think that the people are tired of.

Ryssdal: I’m really trying not to be circular here, Dr. Carson, but if you’re not gonna raise the debt limit and you’re not gonna give specifics on what you’re gonna cut, then how are we going to know what you are going to do as president of the United States?

Carson: OK, let me try to explain it in a different way. If, in fact, we have a number of different areas that are contributing to the increasing expenditures and the continued expenditures that are putting us further and further into the hole. You’re familiar I’m sure with the concept of the fiscal gap.

Ryssdal: Why don’t you explain that a little bit, though.

Carson: OK, well, the fiscal gap is all of the unfunded liabilities that the government owes. Medicare, Medicaid, Social Security, all the departmental programs, all the agency and sub-agency programs extending into the future, which is a lot of money, versus the amount of revenue that we expect to collect from taxes and other revenue sources. Now if we’re being fiscally responsible, those numbers should be fairly close together. If we’re not, a gap begins to occur. We bring that forward to modern day today’s dollars, and that’s the fiscal gap, which sits at over $200 trillion and is continuing to grow. Now the only reason that we can sustain that kind of debt is because of our artificial ability to print money, to create what we think is wealth, but it is not wealth, because it’s based upon our faith and credit. You know, we decoupled it from the domestic gold standard in 1933, and from the international gold standard in 1971, and since that time, it’s not based on anything. Why would we be continuing to do that?

I must confess the lack of comprehension is breathtaking. Dr. Carson would be well advised to read this post.

The entire interview is here.

36 thoughts on “What’s a Debt Limit?

  1. PeakTrader

    What did Dr. Carson say that was wrong?

    And, why can’t Ryssdal accept Dr. Carson wants to freeze federal spending?

    1. Bellanson

      There were two things that he said that were “wrong”:
      1. When asked about the debt limit, he (pretended that he ?) didn’t understand that the debt limit is not the same as the budget. He could have said something like: “The debt limit isn’t the big problem, it’s the fiscal gap – the unwillingness of Congress/Washington/politicians to live within our means (or pay for what we spend)
      He didn’t. (I’m sure that you know very well that if congress decides to pass bills authorizing spending for something, then we must pay for it – if tax revenues don’t match the expenses, then we must borrow or default)

      2. When asked about how he was going to cut the budget deficit he changed the topic to the fiscal gap, which isn’t an appropriate answer for how to avoid borrowing – there is only two ways to achieve a balanced budget: cut expenses or raise taxes/income – and he had excluded the “Increase revenue” portion, which lead to a highly relevant question (that he dodged): where are you going to cut? Instead he started talking about the fiscal gap. (I know that the fiscal gap is the total projected accumulated budget deficit , but saying it, doesn’t answer How to avoid it).
      He had an opportunity to lay out a thoughtful policy here and he blew it – not that that’s never been done before by lot’s of politicians. Call it one technical wrong and one passed up opportunity.

      1. PeakTrader

        Bellanson, so, because he didn’t say what you wanted him to say, he’s wrong.

        Also, there’s nothing in Dr. Carson’s statements that can prove your assumptions.

        It’s just speculation on your part, because you didn’t understand and don’t know (e.g. what’s in his mind).

        I think, Dr. Carson showed leadership, avoided a “gotcha” question, averted the convoluted government accounting, and allowed Congress flexibility on how to balance budgets.

        1. A

          You are misinterpreting Bellanson or Carson, or both. A debt ceiling and budget deficit distinction should not be “convoluted accounting”, at least not for a Presidential candidate.

        1. A

          That was a silly speech containing trivial arguments in support of a dumb vote. If you are arguing that Ben Carson has a rudimentary grasp of economics, then this comparison is unfavorable.

  2. rtd

    Breathtaking, indeed. And very sad. And, unfortunately, I’m willing to bet that there’s an enormous amount of the electorate who will view Carson’s reply as a good one.

  3. Paul Mathis

    “Now the only reason that we can sustain that kind of debt is because of our artificial ability to print money, to create what we think is wealth, but it is not wealth, because it’s based upon our faith and credit. You know, we decoupled it from the domestic gold standard in 1933, and from the international gold standard in 1971, and since that time, it’s not based on anything. Why would we be continuing to do that?”

    Why would we continue to print money? Because it works well and we have been doing it for over 80 years with no problems at all. Since 1933, we have increased the federal debt 800 times over and simultaneously our industrial production has increased 2632% giving us our highest standard of living in history. When has our debt ever hurt us? Never.

  4. 2slugbaits

    Oh my. It’s bad enough that idiotic politicians don’t understand Treasury business, but what’s really breathtaking is the ignorance of a few who regularly post on one of the top econ blogs out there. The debt and the deficit are two completely different creatures. Apparently Dr. Carson and more than a few posters do not understand that we would have to raise the debt limit even if we ran budget surpluses. If you don’t understand why that’s true, then you should really reconsider why you are posting to this blog.

    To make matters worse, Dr. Carson doesn’t seem to understand that raising the debt limit is required in order to make debt payments on past deficits (and also past surpluses…again, if you don’t know why this is true, then why are you posting on this blog?). A good place to begin would be to understand the differences between budget appropriations, budget approval, budget execution and Treasury disbursement.

    1. PeakTrader

      You don’t have to be an accountant to understand revenues and expenses, even with variable interest rates, recessions, expansions, war, and peace.

      What exactly did Dr. Carson say about the debt limit and what didn’t you understand what he said about the debt limit?

      1. Menzie Chinn Post author

        Peak Trader: Given we have undertaken almost all the emergency measures, and are about to hit the limit, then in order to stop from breaching the limit, and not raise taxes, spending would have to immediately be reduced around $485 billion for the next fiscal year (that’s the 2014FY deficit). That’s about 13.8% of Federal outlays. Getting rid of the defense department should do the trick, and leave a spare $100 billion…

        1. PeakTrader

          Menzie Chinn, maybe, Dr. Carson believes freezing government spending, including reducing some spending, can have little effect on economic growth and shrink budget deficits faster.

          Anyway, the country is not in a strong position to meet the needs of the Baby-Boom retirement – providing Social Security, medical care, and other goods & services.

          The country is not even in a strong position for the next recession. Kicking the can down the road may not be the best policy.

          1. Menzie Chinn Post author

            Peak Trader: My point is… is it realistic to expect that within the month, agreement will be reached and plan implemented so that expenditures are reduced nearly 14% with certainty over the next fiscal year in order to not breach the limit? This is a question about feasibility. Otherwise, this is all about flying unicorns.

          2. Anonymous

            No it’s not within this month. But we also know that if we raise the limit nothing is going to change. We will just continue down the path. At some point the unreasonable becomes the only solution.

            What do you really think is the best possible outcome for the long term fiscal health for the US? What is the most likely outcome? It seems to me the most likely outcome is never cutting anything and increasing the debt/gdp by small amounts during “good times” (now) and by enormous amounts during “bad times” (i.e. the next recession, which is in the foreseeable future) until…. some ultimate bad outcome occurs.

            We either suffer now or suffer a lot later. There is no getting around it.

          3. baffling

            “No it’s not within this month. But we also know that if we raise the limit nothing is going to change. We will just continue down the path. At some point the unreasonable becomes the only solution.”

            the entire point of the discussion is the debt limit is not the appropriate tool to engage this discussion. the proper tool is the actual budget. the debt limit is after the fact, a result of differences between spending and revenue. since revenue can vary greatly due to the economy, this is a poor tool to dictate the level of spending. that is where the discussion should be made, in the budget. what happens when you tell the credit card company you will not pay them this month because you are cutting spending?

        2. Anonymous

          I’m all for cutting military expenses, but that is actually one of the enumerated powers and at least some of that is legitimately needed. After a large cut in military expenses, we should probably look at reducing the 60% or so of the Federal Budget that is wealth transfers, starting with end of life expenses in Medicare. Heck if we cut enough maybe we could even afford some INFRASTRUCTURE spending.

          I’d love to raise taxes on the rich to fix our problems, but smart liberals like Menzie know that even taxing the top 1% of IRS returns at 100% will not fix the budgetary problems, so cuts are inevitable.

        3. Steven Kopits

          I think this gets to the heart of the matter. We’re pretty close to the top of the business cycle, and as Menzie points out, the budget is still showing a pretty massive deficit of $485 billion. Now why is that? We borrowed 35% of GDP in the down cycle, so we should pay back35% of GDP (adjusted for nominal GDP growth). On paper, we should be running a surplus of something like 6% of GDP. (Or is Menzie suggesting that counter-cyclical spending now implies multi-cycle counter-cyclical spending?)

          But who has an appetite for that kind of increased taxes or reductions in spending? Democrats? Absolutely not. Republicans? Is there clamoring for fiscal tightening from the conservative electorate? I don’t think so.

          So we’re left with the non-market failure of which I have written many times. Democracies have a deficit bias, because no one can immediately feel the impacts of a deficit. Therefore, there is no meaningful effort to balance the budget, just as there has not been since 1980 (barring Clinton). In his intent, Carson is correct about this.

          Now, shutting down government is problematic. There are reasons to do this, but there are no reasons to do this stupidly. If Republicans intend to play chicken with the President, they need to single far ahead the purpose and timing of their actions. The Republican Congress can dominate the Democratic President, but they have to win in a street fight. You want to be well prepared for that, and give the opponent plenty of time to chicken out first. I am less than convinced a shutdown is the most constructive way to solve the problem.

          On the other hand, balancing the budget is no big deal. The easiest and most productive and most bipartisan method would be an incentive program, about which I have also written many times. http://www.prienga.com/blog/2015/3/19/a-bonus-plan-for-politicians

      2. 2slugbaits

        b>Peak Trader You also don’t have to be an accountant to understand that the flip side of every debt obligation is a corresponding asset. To illustrate the point. here’s a hypothetical. Suppose the on-budget expenses exactly match the on-budget revenues, so the on-budget is in balance. Suppose also that the debt level is zero. Now suppose there is a surplus in the off-budget side; e.g., higher FICA revenues. So now the total budget is in surplus, but yet the Congress would have to increase the debt limit because those FICA revenues would have to be converted into bonds that the government would owe itself. Yes, the debt held by the public would still be zero, the the total debt, which is what Congress adjusts, would be positive. This is an ultra-simple example, but you can use your imagination to work out more complicated scenarios. For example, try working in cases in which Congress appropriates and authorizes dollars in one year, the Departments obligate those dollars in another year, and the disbursements are made in another year. There can be as much as a decade separating those actions. So you would need to raise the debt limit for spending that Congress not only authorized, but required a decade ago because those authorizations are still open obligations to private sector vendors and suppliers.

  5. Rick Stryker

    Well, it’s time to take another trip down memory lane.

    Let’s jump in the wayback machine and go back in time to March 16, 2006. George Bush was President and it was time to raise the debt limit. H.J.Res.47, a bill to raise the debt limit, was being debated in the Senate. Of course, we know what was happening. The Democrats, who fully understand the economics of debt versus deficits, were bravely trying to prevent those idiotic Republicans led by Pres Bush from killing the bill and shutting the government down. In fact, Sen Obama was leading the fight to keep the Republicans from causing financial armageddon. Right? Right? That’s obvious.

    Hmmm. That’s not what I’m hearing as I step out of the wayback machine. Sen Obama is on the floor of the Senate and is saying that he will oppose the bill. What? Let’s listen to an excerpt of what Sen Obama is saying:

    “Mr. President, I rise today to talk about America’s debt problem.

    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. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies.

    …..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 and a failure of leadership. Americans deserve better.

    I therefore intend to oppose the effort to increase America’s debt limit.

    Strange. I thought Democrats were responsible and would never encourage a shutdown of the government. I thought they understood that it’s impossible to vote against the debt ceiling because it would cause the government to default on its debt. It must be that Sen. Obama’s statement is some strange aberration.

    Wait–can this be true? All Democrats voted against raising the debt ceiling in the end? What?

    Pretty shocking trip in the wayback machine. At least I know something. This is not a partisan political post. If I take the wayback machine back to that time again and look at econbrowser, I’m confident that Menzie will have expressed dismay at Sen Obama’s “breathtaking lack of comprehension” just as he did for Ben Carson.

    1. 2slugbaits

      Rick Stryker The difference is that Obama actually knew better and was just acting like a typical hypocrite politician while Carson appears to be a sincere but clueless ignoramus.

      1. Anonymous

        LOL you think if Carson was president he wouldn’t agree to a debt increase? Do you REALLY believe he isn’t just pandering to the right with this talk of not raising the debt? Get real.

        1. 2slugbaits

          Anonymous If elected I would expect Carson to come to the table fully and sincerely believing that the debt limit should not be raised. Yes, I do believe the man truly is that dumb. Now I’m sure that his advisors would ultimately be able to persuade him that it should be raised, but in his heart of hearts he would not want to do it.

      2. Rick Stryker


        That’s just your liberal prejudice talking. How do you know that Obama actually knew better?

  6. Ricardo

    Menzie wrote:

    “I must confess the lack of comprehension is breathtaking.”

    Once again Menzie agree. Ryssdal is an idiot. As Stephen Kopits points out Dr. Carson was trying to educate Rysssdal that his assumption behind the question was wrong.

    Ryssdal: To be clear, it’s increasing the debt limit, not the budget, but I want to make sure I understand you. You’d let the United States default rather than raise the debt limit.

    Carson: No,

    Ryssdal doesn’t understand the difference between the debt limit and spending, nor does he comprehend that a reduction in spending and the elimination of programs will decrease the budget deficit and remove the need to increase he debt limit.

    I hope I am right that Menzie is more educated than Ryssdal. You should never argue with a brain surgeon with half a brain.

  7. Lord

    Going for the goldbug vote. I read these stories of how intelligent he is, but all I hear is bumbling. Going for the bumblers vote or just bumbling?

  8. baffling

    carson is simply engaging in the same tactics other conservative leaders have been employing for years. they are not really interested in solving the problems as they exist in the real world. they already have conservative approved, sound bite ready solutions to problems, and they want to employ those solutions. regardless of the validity of the solution to existing problems. carson has his solution, spending cuts. that is the solution he wants to employ. whether that is the solution to our real problems is irrelevant. bush had a similar solution in the past-tax cuts. applied to the wrong problem. cheney had a solution, bomb iraq. applied it to the wrong problem. it is this disconnect between the conservative solution and real problems that is hurting the credibility of the republican party today.

    1. Anonymous

      I fully support Democrat Barack Obama’s plan from 2006 (as noted in Rick Stryker’s post above) to not raise the debt ceiling. Why don’t you side with Obama on this issue?

      1. baffling

        i disagree with whomever feels it is appropriate to not raise the debt ceiling. it is not appropriate to approve the spending bill, but not the funding mechanism. you should not blindly side with your tribe.

  9. Steven Kopits

    I saw Carson on Charlie Rose last night. I wasn’t overwhelmingly impressed. But these interviews right now are about politics, not policy.

    And, yes, as President, of course he would raise the debt limit.

    Where you stand depends on where you sit. This was, of course, no less true for Obama.

    1. baffling

      steven, i am willing to give carson some leeway on these economic matters. he is not educated in economics, and i imagine when he has been educated on economics issues, it originates from some of the nitwits who continue to promote absurd ideas such as gold standards, eliminate the fed, and voodoo economics of tax cuts are the only answer. hopefully he will surround himself with better people as the election season progresses. only then would he be willing to change his stance on some of the issues where his view is flawed.

      however, carson is an educated man in the field of medicine. and if you listen to some of his commentary, such as on vaccines, you have to wonder if he really is a man of science who lets the data drive his views. last i heard, his views on vaccines indicated he was ignoring the current data set. while he did not flat out refute the current view on vaccines, he certainly let it appears as though ideology was allowed to trump the facts. makes you wonder if he will do the same thing for climate change. or the economics of tax cuts.

      so you are correct, steven, today things are all about politics rather than policy. but i do question whether carson understands that distinction.

  10. Ricardo

    The better question is do you raise the debt limit to enable the big spenders in government or do you raise the debt limit to protect the credit rating of the US. What Carson is trying to teach is that you do not apply for a new credit card to pay off the old card. You stop the spending orgy.

    1. Menzie Chinn Post author

      Ricardo: So, given it is technically infeasible to cut spending sufficiently by November 5th or so to avoid breaching the debt ceiling, the US should default? Your answer seems to be yes.

    2. baffling

      ricardo, you exactly demonstrate the conservative habit of defining a solution to employ irregardless of its validity in that situation. carson (and you) have already defined an ideological solution-spending cuts. now you are simply finding a problem to apply it towards, regardless of the rationality. you advocate stopping the spending orgy-fine. but you already spent the money, and now you owe. if carson “is trying to teach is that you do not apply for a new credit card to pay off the old card” he better learn the lesson that you still need to pay off your existing debt obligation. otherwise he advocates default. as menzie illustrates, if you do not have time available to make those cuts, then you are obligated to make that debt payment somehow. would you have a problem if we stopped paying medicare and social security benefits as a means to reach those spending cuts you want to employ, with no iou?

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