A few thoughts on the debt ceiling — and why it will have to be raised

As we head toward another debate about raising the debt ceiling, it would be good if everyone understood what we’re talking about.

We can make long-term spending part of the debate if we want, but the issue is really about paying bills that have already been incurred and meeting spending requirements that are already existing law — and wildly popular on top of that.

From James Fallows in The Atlantic, The Two Sentences That Should Be Part of All Discussion of the Debt Ceiling:

1. Raising the debt ceiling does not authorize one single penny in additional public spending.

2. For Congress to “decide whether” to raise the debt ceiling, for programs and tax rates it has already voted into law, makes exactly as much sense as it would for a family to “decide whether” to pay a credit-card bill for goods it has already bought.

Re his first point: Congress has authorized spending through myriad bills it has already passed.

And on the second point, I’d quibble a little with Fallows’ analogy — the reality is harsher. A family might delay paying a credit card bill for a couple of months — or even longer — before their financial house would unravel. A family also has the option, depending on their credit card terms, of paying much lower monthly payments, thus in effect incurring larger debts because of additional future interest payments.

To put it simply, we don’t have enough money coming in right now to pay for all the spending that Congress has authorized. The bulk of that spending falls in a few key areas: Social Security, Medicare and Medicaid, and defense. I used the following image in another recent post, What do our federal taxes get spent on?:

WhereOurTaxDollarsGo-f1_rev9-6-12Since we don’t have enough money coming in to cover all those costs, the executive branch will have to decide what payments not to make. Shutting down the federal government and suspending wages for federal employees won’t last us long. In a matter of days or at most a couple of weeks, the United States would have to cut payments for entitlements, quit paying members of the military, stop Medicare reimbursements, etc.

There’s no easy fix to any of this.

By the way, those who didn’t think we should extend the debt ceiling and view our debt as our largest problem should have embraced the so-called fiscal cliff, which would have led to tax increases and spending cuts that would immediately have started paying down the debt, even if such austerity measures put us back in recession.

There’s an interesting piece about the debt ceiling from a conservative perspective in the WSJ today by David Rivkin and Lee A. Casey: The Myth of Government Default.

They note that the Constitution requires that the U.S. pay interest on its publicly held debt — and that there are enough revenues each month to cover that. But their subtitle says it all:

The Constitution commands that public debts be repaid. There is no such obligation to fund entitlement programs.

From the piece:

Second, despite White House claims that Congress must raise the debt ceiling to pay the bills it has incurred, the obligations protected as “debts” by the 14th Amendment do not include entitlement programs such as Medicare and Social Security. These programs are not part of the “public debt,” which consist of loans that are made to the federal government through bonds and similar financial instruments. Entitlement programs are instead political measures that are fully subject to the general rule that one Congress cannot, by simple legislation, prevent a future Congress from making cuts.

In other words, Congress can make deep cuts to entitlement programs, and the executive branch can fail to make Social Security and Medicare payments without breaching the Constitution.

But how many Americans think that failing to pay for those commitments to seniors is the best way to go?

Rivkin and Casey suggest that credit ratings agencies should only consider the repayment of the public debt when they consider the nation’s creditworthiness, but that seems simply pie in the sky.

As I’ve said here repeatedly, we have to do something about the debt over the long-term. We need about $1.2 trillion in spending cuts and/or tax increases over the next decade to stabilize the debt at its current level (i.e., it’s going to increase for a couple of years and then begin heading back down).

But it is an impossibility that the federal government will begin spending less next month than it is taking in. The monthly deficits are trending smaller, by the way, with the rebound in the economy, the return of payroll taxes to their pre-2011 levels, and the increased income tax rates on the largest earners, but those relatively modest measures don’t come close to keeping up with the core expenditures of the federal government.

For more thoughts, I always recommend the work of Bill McBride at Calculated Risk, including this pithy post: Question #1 for 2013: US Fiscal Policy