Debt Limit: What is the Big Deal, It Does Not Do Much.

The Federal Debt Limit increase is still in a state of uncertainty and maybe even chaos. The House Republicans have not yet rallied around the proposal of their Speaker. Votes on have been postponed. In the Senate, well, they are doing nothing but uttering banalities. The President has been publicly silent, watching from back the back row, probably best for the country he do so. He did not lead before, why think it is different now?

 There are some unexplainable conditions regarding the current fiscal crisis. However, first of all, it is important to understand what the current impasse is all about. Unless raised the Federal Government will no longer be able to take on debt that exceeds the current $14.29 trillion limit or ceiling as it is also called. Raising the limit has nothing to do with spending or which programs get what money. Expenditures by the Government are controlled by an annual appropriation process or controlled by pre-authorized and automatic funding (“entitlements”).

 It is accepted that unless the pattern of Government spending is changed the amount of federal debt will double in about 10 years. Hard to believe. The changes suggested by both the Republicans and Democrats amount to about a trillion over the next 10 years for so-called discretionary spending, about 7 percent----hardly a blip, a dent, or headway. Entitlements which compose about forty percent or all spending are untouched. No tax increases. Therefore, what is all the clamoring about? Neither proposal is a serious one if the objective is to reverse long term spending trends. Because of the annual appropriation process, these goals are just that--goals. They can be changed at any subsequent time and funded or non-funded in later years. Look what the $ 800 billion did to spending.

 A casual reader of events may be lead to think all of these reductions have a significant effect on the deficit projected for next year at about $1.3 trillion. To assume that would be a mistake as neither proposal reduces spending more than $40 billion in the next 2 fiscal years. Now, that is not even worthy of the word puny.

 So this is where the failure to raise the debt ceiling becomes less difficult to understand. It does not take any great math accounting skills to figure out that if the debt ceiling is not increased, then the budget, the annual appropriations must be cut by the amount of the deficit. No one is taking about such a drastic measure. The whole process has become so intellectually dishonest and confused by both sides.

 So, what are the conclusions?

 

• The debt limit has to be increased. The gross amount and the timing is a political judgment not an economic one. It will continue to have to be increased as long as the government runs a deficit.

 

• The current proposals as remedies to cut the near-term deficit are a joke. Maybe the level of current spending is prudent (I doubt it) but at least hone up.

 

• The current proposals to restraint longer term spending are miniscule, illusory and subject to the whim of future political and economic decisions.

 Why is it so hard to do what has to be done? Clearly each side has failed to move away from their blind side. Democrats in spite of all of their newly found fiscal rhetorical restraint do not want to cut any programs. They want to raise taxes to sustain or at least delay the inevitable deficit monster. The Republicans both want to stave the beast by denying it revenue food and revive the private sector by keeping economic power in the private sector for economic growth rather than having more money redistributed by the Government.

 I respect all of the people involved in these decisions. It is not easy to tell the public that the medicine is bitter and this will hurt.  Santa cannot come everyday. However, I listen to some of the speeches and rants by both sides and just cringe. It makes me think that neither side is trying. It is not productive. Most politicians are thick skinned. You have to be but it is human nature to be repelled by a person who is constantly denigrating you and your ideas. If Harry Reid says one more time that something is “dead on arrival”, I may put a hole in my television. (Maybe a flat screen in my future)  And he is just an example, not always the worst of them, but close. By the way, Harry has not even made a reservation much less packed or knows where he may be someday arriving. 

 In spite of the criticism of both sides, I do give the House of Representatives and Speaker Boehner some credit. They have voted on a Budget (been more than 800 days since the Senate has), passed the “Cut, Cap and Balance” bill and have brought this last proposal to the floor. The same cannot be said of the Senate or the great compromiser, President Obama, who has not even released a plan.

 I still think the Congress will extend the debt ceiling before I the markets totally turn on the country’s bonds but this is becoming a disgraceful and discouraging episode. The stakes are high, something serious and credible on Federal spending has to be done. This is not that serious attempt and I am not optimistic that these guys—all of them--are the ones to do it. 

 

 

 

Comments

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