A Debt Ceiling Synopsis

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Economics / Political Commentary

One of the goals of my blog is to distill the world of politics and economics down to a format that most people can digest. Today’s topic: the debt ceiling. It’s important, but it’s also complicated. I’ll try to bring you up to speed in under 1,000 words.

Just like every household can have debt, so can our government. And like households, the government must balance its income with its expenditures in order to avoid debt. Typically, a new federal budget is written up and passed into law every year. When our government promises to pay out more (on things like social security, defense, medicare, stimulus, etc.) than it collects through taxes, the result is a budget deficit. Therefore, the government must borrow the money to make up the difference. The borrowed money gets lumped into our total national debt. Furthermore, interest on this debt is continually added to the total.

Here’s a handy National Debt clock that allows you to watch your child’s college fund disintegrate.

In 1919, Congress established a debt ceiling—a certain amount up to which it was willing to pay. By crossing that line, the U.S. is essentially saying that it does not intend to pay. Imagine that you are paying off a house, a car, and college loans, and you decide to call up your lenders and declare that you have no intention of paying them. You can expect that in addition to legal trouble, your credit rating will be destroyed and it will be more difficult to get further loans. On a national level, that’s disaster.

The U.S. government has never defaulted on its debt—the ceiling has been raised almost every year or two since 1939—so any specific predictions about what might happen are speculative, but the economy would definitely suffer. Leaders from both parties agree that the ceiling must be raised.

The debate being held in D.C. is not over the debt ceiling, per se, as much as it is over the particular terms on which it is raised. Really, this is about Republicans—having recently gained a House majority on promises of fiscal responsibility—demanding that an increase in the ceiling come paired with a serious plan to address our debt problem. The real sticking point between John Boehner (House leader), Harry Reid (Senate leader), and the President, is over how to fix it.

In a nutshell, Republicans want to cut spending. They feel that too much money is taken from the job-creating private sector and wasted on failed government projects. Democrats believe those projects are important and distrust the ability of the free market to serve the public interest. They prefer to fill the debt gap by raising taxes. Ultimately, they have to find a way to draw up a plan that they are all willing to put their name on—not an easy task.

If everything collapses and the economy tanks, both parties will point fingers at one another, and they’ll both be right. The truth is, Americans are fundamentally divided on the role of government and how to improve the economy. We have elected representatives to battle it out and produce an agreement that embodies, however loosely, the so-called “will of the people”. After electing a democratic president and Senate, America made a shift to the fiscal right by electing a Republican House. Now both sides are fighting for their constituencies, and neither is willing to give in until they have to.

The President of the United States is not a representative in Congress; he is an executor of its laws. The veto power is his only legislative tool. However, over the course of history the Chief Executive has become more influential, placing the president toe-to-toe with Congressional leaders. But his one distinct advantage is known as the “bully pulpit”. Obama’s talk of starving old ladies to buy corporate jets for “millionaires and billionaires” will get much more attention by the media than its substance merits.

THE OUTCOME (in my view)
I don’t think this will end in catastrophe. In the next few days, Congress will produce a lackluster compromise that will leave much to be desired from both parties. Unless he wants to leave a legacy as the president who ended the American era, Obama will have to sign whatever lands on his desk. Though he will try to place blame, no excuse will deflect the fact that it all happened on his watch, especially after such large Democratic majorities in his first two years.

This doesn’t help his reelection campaign. Had he maintained a positive and professional attitude, he may have come out of this as the Clintonesque bipartisan president he touts himself to be. Instead he will be the president who griped about having his own way, while reluctantly saving the economy from his own disastrous policies.

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