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.
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.
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:
- Once raised, they never come back down.
- 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:
- How big should government be?
- Can government spending stimulate the economy?
- 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.