President Obama recently made the statement, “Raising the debt ceiling… does not increase our debt.” Thus began what has become perennial debate between the president and Congress about raising the debt ceiling.
In his remarks, President Obama also said, “All [raising the debt ceiling] does is it says you got to pay the bills that you’ve already racked up, Congress. It’s a basic function of making sure that the full faith and credit of the United States is preserved.”
Also recently, the president said in a campaign-style speech to autoworkers that Republicans are “willing to plunge America into default, if we can’t fund Obamacare… We don’t run out on our tab. We just can’t not pay our bills… I will not negotiate over the full faith and credit of the United States.”
There are three kinds of obligations: debt already incurred, legal promises made, and political promises made.
Debt Already Incurred
This debt is the debt that is clearly seen. You can check this amount on the Debt Clock website, http://www.usdebtclock.org/. It’s the amount that the U.S. has borrowed from individuals, countries, and anyone else that has bought our treasury bonds. This amount is currently $16.7T (according to the Treasury). In order to hold that debt, the U.S. pays interest on that debt every year. It doesn’t actually pay OFF the debt, it just pays interest on the debt to service the debt, and it’s on track to be around $420B this year. Given that the U.S. Treasury brings around $2,449B (in 2012), the U.S. can easily service its existing debt, with no danger of default. The only reason that we would default on our current debt is if someone in charge decides not to make our interest payments.
Legal Promises Made
If the U.S. enters into a contract with an individual or company, they are legally and morally obligated to make good on those contracts, which can mean incurring more debt to do so. The U.S. may sign a contract with a defense company to design and build a new fighter jet. It may sign a contract with a construction company to build a road or a building. It may sign a contract with an employee to do contract work. These are legal obligations. However, even these contracts are usually written so that the U.S. can get out of them if the economic environment changes, and sometimes for no reason whatsoever.
So, the country may have some contractual obligations of which it can’t get out, but these are relatively small.
Political Promises Made
The largest area of obligations is political obligations. These are political promises that have been made, like Social Security funding, Medicare funding, funding departments like Commerce, State and HUD, etc. We cannot “default” on these obligations. They are not obligations that are set in stone. A political promise that was made by politicians 20 years ago cannot bind a Congress today. The Congress today cannot bind the Congress four years from now. Congress could, if it wanted, pass a law that disbanded Social Security and Medicare, and we would not have to incur debt to pay for those programs (it would be morally wrong to put the elderly out on the streets, and it would be political suicide, but it could be done). The Congress could, if it chose, close the Department of Education and the Department of Commerce, and we would not be obligated to incur debts to pay for those departments any more. The Congress could, if it chose, decide to fund the military at 2% of GDP instead of 3% of GDP, and the U.S. future debt obligations would go down.
The reality is, the U.S. can service it’s debt, pay for Social Security, Medicare, Medicaid, and all military salaries, and still have $17.5B left over every month (see chart below). So, when Democrats make the argument that not raising the debt ceiling will cause us to default on our debts, they’re just plain lying.
|U.S. Monthly Income||
|U.S. Monthly Debt Interest Payments||
|U.S. Social Security Payments||
|U.S. Medicare and Medicaid||
|U.S. Soldiers Salaries||
|Total Left Over||
The Bottom Line
Leaving the debt ceiling in place, rather than raising it, would force irresponsible politicians in Washington, D.C. to finally face the hard problems, change the political promises that were made by politicians in years past, and put the United States on the path to living within its means. It would force them to pay our bills, rather than borrowing money to avoid paying our bills.
However, clearing up that Democrats are lying about whether the U.S. will default on its debt doesn’t answer the question about whether or not freezing the debt ceiling will cause other economic problems or what changes need to be made in order to live within our means, but those are the right questions to be debating. I hope to write again in the future about these other issues.