Debt ceiling: Get ready five months of nonsensical bloviating over our insane finances

The names of the politicians in Washington change, but the debt and the debt ceiling keep on increasing at an almost exponential rate, over a monstrous $30 trillion.  Some, however, continue to insist that raising the debt ceiling is just a routine vote that should be accomplished without question, while others claim the idea of a limit on our debt is unconstitutional in and of itself.

Few things are as predictable in politics as a battle over increasing the debt ceiling when power is shared in Washington between Democrats and Republicans.  Suddenly, the minority party, whichever it may be, becomes the pillar of fiscal sanity while the majority rails against the untold horrors of failing to accumulate ever more debt, forever.  The statements, the bloviating, and the extreme rhetoric remain the same.  Only the names have changed, but even that isn’t strictly true, for many are those that have taken both sides of the issue depending on what was politically expedient at the time.  “America has a debt problem and a failure of leadership. Americans deserve better. I therefore intend to oppose the effort to increase America’s debt limit,” then-Senator Barack Obama soberly intoned while voting against a 2006 increase in the debt ceiling when President George W. Bush was in office.  As President, however, he had completely changed his position.  “I cannot remember a time when one faction of one party promises economic chaos if it can’t get 100 percent of what it wants,” he said in 2013. “That’s never happened before,” he added while insisting his administration would not negotiate with Republicans over an increase.  Equally predictable is a mainstream media chock full of stories about the devastation surely promised by failing to increase the limit even more, along with attacks on anyone who attempts to impose economic sanity.

The stories start early and often these days.  We will not hit the debt ceiling until June, but CNN is already priming the pump, claiming the “US hits debt ceiling, prompting the treasury to take extraordinary measures.”  They quote National Economic Council Director Brian Deese.  “This is about economic stability versus economic chaos,” he told Kaitlan Collins on “CNN This Morning,” echoing President Obama and claiming perpetual debt was Congress’ “basic, fundamental obligation.”  “Even just the specter that the United States might not honor its obligations does damage to the economy,” he added amping up the hysteria.  In addition to the specter of government shutdowns, failure to promptly pay tax returns, and other calamities of not continuing to fund the most expensive, bloated government in the history of the known universe, Secretary of the Treasury Janet Yellen warned of a “global financial crisis” if the ceiling is not promptly increased.  CBS warned individual citizens of “3 ways your finances could be affected,” “many Americans would likely see a decline in their wealth as the stock market recoiled, bringing down the value of their 401(k) plans. Social Security beneficiaries and others dependent on government programs might not get their monthly checks.”  Suddenly, they are concerned about the value of your portfolio and surging borrowing costs, blissfully unaware that the stock market just experienced its worst year in well over a decade and interest rates have more than doubled.  We’re supposed to be concerned about this now?

Regardless, CNN does sum up the situation nicely, though without mentioning the obvious sense of having been here and done that.  “Hardline Republicans, who have enormous sway in the House because of the party’s slim majority, have demanded that lifting the borrowing cap be tied to spending reductions. The White House countered that it will not offer any concessions or negotiate on raising the debt ceiling.”  Thus, the battle lines are drawn for the next five months, and the rhetoric will only get more heated.  Progressive economist Paul Krugman, for example, is already claiming that President Biden should refuse to negotiate with “economic terrorists” and falsely arguing that we should not even question whether or not to raise the debt ceiling without doing anything about the excessive spending that is driving it in the first place.  As he put it, “A few days ago I received an automated text from my bank. For some reason the bank’s algorithm flagged a valid charge on my debit card as potentially questionable; the text asked me to verify the purchase.  In a rational world raising the federal debt limit would be regarded as the equivalent of typing ‘1’ in response to that text — acknowledging a purchase that you have already made.”  This will be a common refrain:  We’ve already spent the money, so who cares about another few trillion piled on top of the over $30 trillion we currently owe?  Raising the debt ceiling, you see, “simply allows the government to honor its promises, which include everything from paying interest on its debt to sending checks to Social Security recipients. These promises, duly authorized by Congress, exceed the expected amount of taxes and other revenue, so they must be met in part through borrowing; but that’s normal operating procedure, and financial markets are happy to lend us the money.”  Mr. Krugman fails to mention that they are happy to do so for an increasingly exorbitant fee, one that will only grow as we pile on more debt at ever higher interest rates.  The Congressional Budget Office estimates we will spend a whopping $400 billion this year on interest alone, close to 10% of all government spending, and roughly $3,055 per household in the United States.  This is more than the government spends on Social Security Disability Insurance, food and nutrition services, housing, and transportation.  It’s 40% of what we spend on national defense.  To put this in perspective, the average family spends less than $3,000 on gasoline for the year, furnishing their home, clothing, and personal care, according to the Committee for a Responsible Budget.

Somehow, however, Mr. Krugman and others feel this situation is entirely routine, even as these payments are likely to skyrocket in response to interest rates.  Every percentage point increase in interest adds about $38 billion to the cost of servicing the debt, meaning we could easily be spending $500 billion or more by the end of the year if interest rates continue to rise as expected.  So little is his concern, he suggests ways Democrats might raise the debt ceiling without following the actual law for raising the debt ceiling.  Instead, the government could simply mint a “platinum coin with a face value of, say, $1 trillion, depositing that coin with the Federal Reserve and spending out of the bank account thus created. Believe it or not, this would almost certainly be legal.”  How anyone could recommend this when the Federal Reserve’s cheap monetary policy and endless printing of money along with profligate government spending precipitated the spike in inflation and interest rates, and another trillion would surely lead to more remains unsaid.  Mr. Krugman does, however, suggest another gimmick.  “Another option would involve raising money by issuing ‘premium bonds’ when existing debts come due — bonds whose face value is the same as that of the bonds they replace, so that they don’t officially increase the debt, but offer high interest rates, so they sell for much more than their notional value.”  Even he admits, these “would, of course, be financial gimmicks. So? If it takes gimmickry to frustrate the schemes of destructive extremists empowered by a legal quirk, and thereby avoid financial catastrophe, so be it.”

Mr. Krugman is so adamant in his belief that the debt ceiling is a legal quirk, he takes the astonishing position that it is, in fact, unconstitutional in the first place.  “The 14th Amendment to the Constitution says that the validity of public debt ‘shall not be questioned,’ which might be construed as a reason to ignore the debt ceiling rather than default on payments.  Alternatively, it seems fair to say that the White House is facing incompatible demands. Congress has, through duly enacted legislation, specified levels of federal spending and taxes; but one house of Congress appears poised to tell the president that he can’t raise the money he needs to obey the previous legislation. Since it seems that President Biden can’t avoid breaking at least some laws if the debt ceiling isn’t raised, ignoring the debt ceiling may be the ‘least unconstitutional’ option.”  Yes, one of Mr. Krugman’s solutions is to ignore yet another law, believing spending bills, which change every year anyway and are constantly modified by legislation, are somehow superior to the much longer standing law that underpins the debt ceiling and ignoring that Congress specifically rejected that view in 1995 when they removed the “Gephardt Rule” which tied spending bills to the debt in 1979.  Believe it or not, prior to 1917 Congress had to authorize the debt every year, but then during World War I they established the first debt ceiling with the Second Liberty Bond Act of 1917.  The law was further refined in 1939 and 1941 with the Public Debt Acts.  At the time, the total debt was  merely $65 billion, a rounding error by today’s standards.  Even by the end of World War II, the most massive undertaking in United States history, it had only increased to $275 billion.  Politicians, however, have always chafed against any attempt to reign in their spending.  The limit was increased some 90 times in the 20th century, and 14 times in the 21st even before President Donald Trump took office in 2017.

This has led many to believe that the debt ceiling does not serve the purpose of limiting the debt, but that ignores the obvious fact that between 1945, when debt was at a peak after the war, and the start of the welfare state 20 years later, debt only increased by $58 billion.  After 1965, however, it began to skyrocket, hitting $1.823 trillion in just twenty years.  Putting this another way, we added 25 times as much debt between 1966 and 1985 than between 1945 and 1965.  The situation has only gotten worse from there, between 1986 and 2005, we piled on another $6.11 trillion.  In the less than twenty years since then, we have added close to an astonishing $25 trillion.  How is it possible to look at these numbers and conclude that continuing down this same course should be accepted as a fact of life the same as the change of the seasons?  The number in absolute dollars alone does not tell the full story either.  At the end of World War II and all of the massive borrowing required to sustain the effort, debt peaked at 119% of Gross Domestic Product in 1946.  As late as 1981, it had been reduced to a mere 31%, but then it began an inexorable climb.  Today, it stands at 123% of GDP, the highest in US history, but some still want to keep piling on more, claiming it’s the constitutional thing to do because the debt ceiling doesn’t work anyway.  Sadly, this is yet another falsehood.  Fights over the debt ceiling can be ugly, yes, but that doesn’t mean they are always ineffective.  The 2011 battle between President Barack Obama and those wily, recalcitrant Republicans lead to the much maligned, but quite successful Budget Control Act of 2011, colloquially known as the “sequester.”  In exchange for increasing the debt ceiling by a total of $900 billion, the bill cut spending by $911 billion over 10 years and created a mechanism to force another $1.2 trillion in cuts by the time the next increase in the debt ceiling would be needed.  The mechanism was simple:  Congress allowed itself the period prior to the next increase in the debt ceiling to agree to these cuts, but if they failed to reach an agreement $1.2 trillion would be applied across the board, what was called “sequestrations.”  Despite all the horror stories surrounding it, the Budget Control Act worked for a time.  The Federal Budget peaked at $3.8 trillion in 2011, but declined to $3.5 trillion by 2014 without any of the calamities that were said to ensue.  Of course, politicians simply couldn’t stomach not being able to spend as much money as they pleased, and by 2013 were they busy increasing the sequestration caps and pushing off the spending cuts.  Not surprisingly, spending once again began to explode, hitting a record $3.9 trillion in 2015 on its way to an insane $6.3 trillion last year.

Unfortunately for the American taxpayer, both parties are to blame, colluding with each other to spend and borrow as much money as possible and refusing to accept any constraints, as we saw at the end of last year with the bloated omnibus that arrived in the dark of night.  Conservative Republicans in Congress have promised to change that this time around and impose some sense of fiscal sanity, hence the clarion calls for its opposite from Mr. Krugman and others in the mainstream media.  We should wish conservatives luck, but not hold our breath.  This is a conversation that has to be had and a battle worth being fought, but the appeal of endless money is far too tempting whether there is an R or a D next to your name and I fear any imposed sanity will be quickly discarded.

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