Friday, July 15, 2011

Thoughts on the debt ceiling

Comments made in response to an article and other comments about the debt ceiling debate...
Unless Republicans and Democrats reach a deal to increase the debt ceiling by July 22, so that a bill can be passed by Aug. 2, the government will probably default, and many believe it'll be economic Armageddon, take two
August 2nd is an arbitrary deadline, and there will be plenty of money in the treasury to cover all obligations.

And there won't be a default, because they'll come to some agreement that prevents it. No one wants it, so it won't happen. Much ado about, well, not nothing, but about something that's not going to happen.
It's crazy not to include revenue increases.
In the first place, the problems are far (far far far) bigger on the spending side than the revenue side, and to include "revenue increases" before some spending discipline is involved is to push the problem further down the road. I think most people understand that revenues are going to have to go up, but the typical result of negotiations like this is revenues that go up now with poorly defined spending cuts at some point in the future that never arrives. They need to address the core issue, which is trillions of dollars worth of future spending commitments that can't be met. The idea that the best they are capable of doing is $2 Billion in cuts is a bad joke.

In the second place, the revenue problem at the moment is largely the result of the dreadful economy. It's easy to say "we need revenue increases," it's not necessarily easy to do. Which rates are you going to raise, and by how much, and how much actual revenue will that raise, and how many more jobs will be lost as a result?
For 2011, revenue is 3.5 percentage points of GDP below the long-term average, and spending is 4 percentage points above it. I don't know if four "fars" are necessary.
2011 isn't the problem. If 2011 were the only problem, there wouldn't be a fight going on right now. The long-term structural debt is the problem, the spending commitments that cannot possibly be met.
1. Warren Buffett: I don't see how a country that skips payments to millions of people [social security] is triple-A.
2. "Standard & Poor’s said there was a “substantial likelihood” it could lower its AAA grade on Treasury debt because of the political battle over the federal debt ceiling and spending cuts. S&P follows rival Wall Street ratings firm Moody’s Investors Service, which on Wednesday put its top-rung U.S. rating under review for a possible downgrade."
They've been threatening to downgrade because of the debt itself - not the ceiling, the raising of which only makes the debt worse - since the first of the year. Moody's, in January, warned about the possibility of a downgrade based on "uncertainty over the willingness and ability of the U.S. to reduce its debt." S&P changed its rating on the US to "negative" in April, because of "very large budget deficits and rising government indebtedness."

The idea that everything will somehow be just ducky if only the Republicans will acquiesce to all of the President's desired tax and spending plans and raise that pesky debt ceiling, which seems to be the underlying assumption behind many of these comments, doesn't square with the reality that I see...

And there's no excuse whatsoever for the US government to skip a single Social Security payment in August, and the President's threat to do so is offensive.

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