The Debt Ceiling

The "crisis" in Washington over the Debt Ceiling would be comical if it was not so serious. Ringling Brothers could not have staged a better performance of a "debt defying act" -- oops, that's "death defying act."

There is no reason not to raise the debt ceiling. It must be done sooner or later. Tying a vote on raising the ceiling to spending cuts is taking our fiscal process hostage. It is being done to leverage a particular solution to a separate problem - an imbalance between tax revenue and spending.

Whether you believe the imbalance is because we spend too much, or because we tax too little, the imbalance is its own problem. It is, however, linked to the debt, because the imbalance is what drives the debt upward. Fixing the debt problem must be accomplished by fixing the imbalance in the annual operating budget of the government. It is the only prudent way. Because the imbalance is so large (roughly $1.4 trillion), the gap can't be closed only by spending cuts or revenue increases, it requires both. The gap must be bridged by building from both sides, not just one.

Defaulting on the debt is highly unlikely. The consequences are not exactly known, but are surely exceptionally unpleasant at the least. Given that fact, the government would choose to channel available funds first to debt service. Cuts would come from other programs. And they would be drastic. So the more likely fear is not for debt default, but for service shutdowns. It will not be bondholders, but service recipients, a.k.a. taxpayers, who will be affected the most.

Ron Paul suggested in a piece carried on Bloomberg, that default now would be better than default later and there was no other answer. The equivalent on a personal level would be something like saying that everyone with a mortgage and an unbalanced monthly budget would have to declare bankruptcy to fix their problems. Simply not so. This either/or thinking is fallacious. Mr. Paul is part of the problem, not the solution.

Whatever you think of Pres. Obama and his speech on July 25, he got a lot of it right. This is not a problem with a one sided solution - cut spending. Unfortunately, when a Democrat suggests a tax increase you get the Republican reaction (shared by non Republicans as well), that it is just another pick from the pocket of the taxpayer, (albeit wealthier ones) aimed at avoiding hard cuts and political disfavor. As it turns out, President Bush (W) gave taxpayers a gift he couldn't pay for in the form of tax cuts and President Obama gave one he couldn't afford in the form of a stimulus package. Mr. Obama is now in the unenviable position of having to take the gifts back in the form of spending cuts and tax increases. It's probably not the "change" he anticipated when he ran for office.

To filter the rhetoric coming from Washington, we need to remove the term "government" and substitute the word "taxpayers" when talking about money. The government is only an intermediary in taking money from taxpayers and dispersing it to others to acquire goods and services for the benefit of taxpayers. The government, per se, has no money. IT gives nothing to anyone. It merely takes from some and redistributes to others. This is not to disparage government, only to recognize that any discussion of spending cuts and revenue increases ultimately rests on the taxpayers. Nothing about the government is "free."

Today the cost of running the government is about 40% greater than the incoming revenue. That "excess" is the annual deficit and is financed by borrowing. To bring things in line requires a combination of: a) cutting services we can do without and b) raising the funds to pay for those we deem essential. Continued borrowing is like buying groceries on credit with no intention or means of paying it off. That's truly a "moral default." Unfortunately, it is politically expedient for those seeking reelection and it has been going on for a long time.

It is worsened by the fact that roughly half the working population pays no federal income tax, yet enjoys nearly the same or greater benefits than the paying population does. This lopsided financial distribution in a democracy means the "getters" can force the "givers" to put even more into the system simply by applying majority voting power.

There has already been at least one bipartisan committee (Simpson-Bowles) who looked at this situation and made recommendations. They may not be perfect, but they probably represent a reasoned compromise. Certainly, they have to be better than what is coming from our politicians lately. That's one solution.

Interested in another solution? It's not pretty, but it is simple. Adjust spending and revenue by 7% each year (roughly $170 billion). The first year, cut government spending from current levels by 7% and leave revenue alone (no tax increases because the economy is still fragile). In the second year, cut spending 6% and increase tax revenue by 1%, then 5% and 2% in year 3, etc. Continue to change the mix until the annual budget is balanced in approximately 7 years. Then, go one or two more years further to create a surplus to use to reduce the debt. This approach forces changes immediately and avoids the Congressional ploy of claiming "cuts over 10 years" where all the savings supposedly happen at the end and nothing changes now. This approach also does not mean every part of the government goes down by the same percentage. In any given year, the defense budget could go down twice as much as say the education budget.

Would this be painful? Absolutely. It would likely mean the loss of employment for people on the government payroll and those providing services to the government from private industry. It would also mean limits to the growth of social benefits or possibly some reductions. This economy is a bad time to do this, but it is what we face sooner or later - and later only means the debt has grown even more.

The first place to start? Congress. Their budget is $5 billion a year. Not much compared to the trillions of deficits, but a little taste of this medicine would be good for our friends in DC.