Alright, I didn't really want to go here because it's being hammered to death, but I'm getting a lot of questions about the debt ceiling, and most of the explanations I'm seeing from the media suck. So here's my take.
Why do we have a debt ceiling?
A government the size of the United States has an amazingly large financial gray area lurking in predicting the funding necessary to do its job. This gray area is the necessary costs to running the government that we can't predict in advance of a regular budget. By way of example, a single day of operations in Iraq or Afghanistan costs roughly 720 million dollars. Generally speaking, nobody can predict the outbreak, start, or end of war. Similar expenses include natural disasters such as Katrina or man made disasters such as the Wall Street scandals. Not all such gray expenses are negative either. Unexpected opportunities can arise that defy the planned budget or were dependent on unlikely legislation for infrastructure, new projects, and investment in new technologies that then require money to fund.
Now the government could, in theory, manage these unknowns by saving up a lot of money through excess taxation and keep it on hand for such things. I think we're all in agreement that saving up trillions of extra dollars 'just in case' would not be very responsible and would create a severe drain on the economy.
The better way to handle it is to budget for the predictable expenses and then then borrow to meet the unexpected as those costs occur. This kind of borrowing allows future budgets to treat the unknown costs of the past as known costs of the future. In this way the government can pay up front for what it suddenly needs, then budget to pay off that cost over a period of years afterwards.
But responsible borrowing brings with it two risks.
The first is if the government borrows without limit. If lenders believe the government will simply borrow again and again every time it needs cash and never make a reasonable effort to pay its previous loans back, they will hike interest rates or tighten purse strings or refuse to lend entirely. The debt ceiling's primary purpose is to assure the market that we will only borrow so much, and therefore we have a vested incentive to pay back its loans.
The second is default. If the government hits the debt ceiling, we lose the ability to make payments on our loans, not to mention all the other recurring bills the government has to pay for. If that happens, interest rates go up, lenders tighten their purse strings or refuse to lend entirely which locks the government into a spiral of being unable to meet its past obligations.
See a pattern?
Are you imagining a man on a tightrope with a balancing staff like I am?
Now I can't hammer this enough, the government loans governed by the debt ceiling are mostly used to pay for the past. It is a way to convert unexpected, unknown costs we could not budget for (fixing New Orleans after Katrina) into known, predictable costs we CAN budget for (the loan we took out to pay for fixing New Orleans after Katrina).
Raising the Debt Ceiling?
What good is a ceiling limit if you never stop raising it? Well it's a little more complicated than that. When you're dealing with trillions of dollars and paying for past debts, minute increases in inflation, interest rates, and particularly prolonged costs like wars and tax cuts can mean the debt ceiling established long ago is quickly nowhere near enough to maintain government function. Default is threatened, and raising the ceiling is the only responsible act as defaulting would throw the economy into a tailspin as our creditors rush to call their loans early and get out of this suddenly untrustworthy debtor's financial morass.
So measured, reasonable increases to the ceiling based on the governments necessary activities have never drawn protest no matter who is in office. In fact most debt ceiling increases are a few sentences in another bill, or, if alone, are a single page long. Since 1940, the debt ceiling has been increased over 50 times. Under George W. Bush, it was increased 8 times with a majority of the Republican congress voting for the increases. It has been, and remains, a matter of congressional housekeeping. Everyone knows the debt ceiling needs to be there, and needs to be maintained alongside the the necessary expenses the government has accrued in the past.
Today's Fiasco
So we covered that debt, as a whole, is a matter of converting the unexpected and unpredictable costs of yesterday into the predictable, known costs of tomorrow in the form of a loan. So starting in 2000, we have the following events.
1. The Bush tax cuts during a time of surplus – US Revenue decreased.
2. 911 and the Wars – Massive increase US necessary costs.
3. Katrina disaster – high increase to US necessary costs.
4. Real Estate/Wall Street meltdown – Massive decrease in US revenue from taxes.
Note, we do have a revenue problem: When the tax base crumbles under economic duress, the amount of dollars collected by the government in taxes goes into free-fall, and the cost of soldiers or social security checks doesn't change.
Note, we do NOT have a discretionary spending problem. We have a NECESSARY spending problem. We have adopted military projects among others that have tripled the size of our military spending under Bush. These are considered 'necessary' by congress.
Without spending a single dime on discretionary projects, the US suddenly found it's revenue dropping like a rock and it's costs soaring through the roof through a series of unexpected events. The result was the immediate need to seek external revenue just to keep the government operating.
Now enter the Tea Party into Republican politics. Let me take a moment to note that Republican party historically has never misunderstood the debt ceiling. They are keenly aware that their primary supporters and donors would be hit harder than even most average Americans by a ceiling default because of how much those donors generally have invested in the marketplace.
But these new Tea Party activists make the irrational link between proposed government growth and the need for the ceiling increase. To them, 'debt ceiling' means 'limit on arbitrary ability of government to grow'. It fails in the basic comprehension of the fact that the debt ceiling is on a large time delay from the events that prompt its rise, and it is almost never discretionary spending that drives it. The Republican party, however, is held hostage to these voter's simplistic understanding of the issue. They are backed into a corner between donors who do not want the ceiling to ever be hit and voters who, in bulk, have bought into the misunderstanding that the debt ceiling is a way to limit government.
What it boils down to is that the tea party has imagined themselves another magic bullet. They think they have found another way to just pull a cord, press a button, or pull a trigger and stop government. In so doing, they are playing a deadly game with our fragile economy. There are places to have serious discussions about rolling back some government growth in the military, ending the wars, and reforming entitlement programs, but these will not be a source of instant gratification. They will not happen in a single vote after which small government utopia blossoms like a little red butterfly to flit away on tea-bag shaped gossamer wings. It will be a series of hard choices and bitter battles that may require Americans to give up programs and pay more in taxes to their government to help play their part in the patriotic muscle we've flexed this last decade and for the choices me made to bail out Wall Street and Main Street.
Don't let the Tea Party tell you the debt ceiling is about our future. It's not. It's about taking responsibility for our past. If you look at the events I listed above, the US ran into some of the roughest waters it's ever seen. The infrastructure we have prevented us from seeing a depression worse than anything in our history, but the debt we accumulated in the process are dangerous waters indeed. We need to navigate them together and stop trying to find a light-switch we can flip to just make it all go away.
Because if we flip THIS switch and claim victory over big government by blocking the debt ceiling, we all really WILL be left in the dark.
Why do we have a debt ceiling?
A government the size of the United States has an amazingly large financial gray area lurking in predicting the funding necessary to do its job. This gray area is the necessary costs to running the government that we can't predict in advance of a regular budget. By way of example, a single day of operations in Iraq or Afghanistan costs roughly 720 million dollars. Generally speaking, nobody can predict the outbreak, start, or end of war. Similar expenses include natural disasters such as Katrina or man made disasters such as the Wall Street scandals. Not all such gray expenses are negative either. Unexpected opportunities can arise that defy the planned budget or were dependent on unlikely legislation for infrastructure, new projects, and investment in new technologies that then require money to fund.
Now the government could, in theory, manage these unknowns by saving up a lot of money through excess taxation and keep it on hand for such things. I think we're all in agreement that saving up trillions of extra dollars 'just in case' would not be very responsible and would create a severe drain on the economy.
The better way to handle it is to budget for the predictable expenses and then then borrow to meet the unexpected as those costs occur. This kind of borrowing allows future budgets to treat the unknown costs of the past as known costs of the future. In this way the government can pay up front for what it suddenly needs, then budget to pay off that cost over a period of years afterwards.
But responsible borrowing brings with it two risks.
The first is if the government borrows without limit. If lenders believe the government will simply borrow again and again every time it needs cash and never make a reasonable effort to pay its previous loans back, they will hike interest rates or tighten purse strings or refuse to lend entirely. The debt ceiling's primary purpose is to assure the market that we will only borrow so much, and therefore we have a vested incentive to pay back its loans.
The second is default. If the government hits the debt ceiling, we lose the ability to make payments on our loans, not to mention all the other recurring bills the government has to pay for. If that happens, interest rates go up, lenders tighten their purse strings or refuse to lend entirely which locks the government into a spiral of being unable to meet its past obligations.
See a pattern?
Are you imagining a man on a tightrope with a balancing staff like I am?
Now I can't hammer this enough, the government loans governed by the debt ceiling are mostly used to pay for the past. It is a way to convert unexpected, unknown costs we could not budget for (fixing New Orleans after Katrina) into known, predictable costs we CAN budget for (the loan we took out to pay for fixing New Orleans after Katrina).
Raising the Debt Ceiling?
What good is a ceiling limit if you never stop raising it? Well it's a little more complicated than that. When you're dealing with trillions of dollars and paying for past debts, minute increases in inflation, interest rates, and particularly prolonged costs like wars and tax cuts can mean the debt ceiling established long ago is quickly nowhere near enough to maintain government function. Default is threatened, and raising the ceiling is the only responsible act as defaulting would throw the economy into a tailspin as our creditors rush to call their loans early and get out of this suddenly untrustworthy debtor's financial morass.
So measured, reasonable increases to the ceiling based on the governments necessary activities have never drawn protest no matter who is in office. In fact most debt ceiling increases are a few sentences in another bill, or, if alone, are a single page long. Since 1940, the debt ceiling has been increased over 50 times. Under George W. Bush, it was increased 8 times with a majority of the Republican congress voting for the increases. It has been, and remains, a matter of congressional housekeeping. Everyone knows the debt ceiling needs to be there, and needs to be maintained alongside the the necessary expenses the government has accrued in the past.
Today's Fiasco
So we covered that debt, as a whole, is a matter of converting the unexpected and unpredictable costs of yesterday into the predictable, known costs of tomorrow in the form of a loan. So starting in 2000, we have the following events.
1. The Bush tax cuts during a time of surplus – US Revenue decreased.
2. 911 and the Wars – Massive increase US necessary costs.
3. Katrina disaster – high increase to US necessary costs.
4. Real Estate/Wall Street meltdown – Massive decrease in US revenue from taxes.
Note, we do have a revenue problem: When the tax base crumbles under economic duress, the amount of dollars collected by the government in taxes goes into free-fall, and the cost of soldiers or social security checks doesn't change.
Note, we do NOT have a discretionary spending problem. We have a NECESSARY spending problem. We have adopted military projects among others that have tripled the size of our military spending under Bush. These are considered 'necessary' by congress.
Without spending a single dime on discretionary projects, the US suddenly found it's revenue dropping like a rock and it's costs soaring through the roof through a series of unexpected events. The result was the immediate need to seek external revenue just to keep the government operating.
Now enter the Tea Party into Republican politics. Let me take a moment to note that Republican party historically has never misunderstood the debt ceiling. They are keenly aware that their primary supporters and donors would be hit harder than even most average Americans by a ceiling default because of how much those donors generally have invested in the marketplace.
But these new Tea Party activists make the irrational link between proposed government growth and the need for the ceiling increase. To them, 'debt ceiling' means 'limit on arbitrary ability of government to grow'. It fails in the basic comprehension of the fact that the debt ceiling is on a large time delay from the events that prompt its rise, and it is almost never discretionary spending that drives it. The Republican party, however, is held hostage to these voter's simplistic understanding of the issue. They are backed into a corner between donors who do not want the ceiling to ever be hit and voters who, in bulk, have bought into the misunderstanding that the debt ceiling is a way to limit government.
What it boils down to is that the tea party has imagined themselves another magic bullet. They think they have found another way to just pull a cord, press a button, or pull a trigger and stop government. In so doing, they are playing a deadly game with our fragile economy. There are places to have serious discussions about rolling back some government growth in the military, ending the wars, and reforming entitlement programs, but these will not be a source of instant gratification. They will not happen in a single vote after which small government utopia blossoms like a little red butterfly to flit away on tea-bag shaped gossamer wings. It will be a series of hard choices and bitter battles that may require Americans to give up programs and pay more in taxes to their government to help play their part in the patriotic muscle we've flexed this last decade and for the choices me made to bail out Wall Street and Main Street.
Don't let the Tea Party tell you the debt ceiling is about our future. It's not. It's about taking responsibility for our past. If you look at the events I listed above, the US ran into some of the roughest waters it's ever seen. The infrastructure we have prevented us from seeing a depression worse than anything in our history, but the debt we accumulated in the process are dangerous waters indeed. We need to navigate them together and stop trying to find a light-switch we can flip to just make it all go away.
Because if we flip THIS switch and claim victory over big government by blocking the debt ceiling, we all really WILL be left in the dark.
Very clear explanation, Andre.
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