A few weeks ago, I wrote a piece on the problems facing the nation’s debt ceiling. The debt ceiling, or limit, had nearly been reached. Our leaders in Washington had roughly six weeks to do any combination of the following before the August 2nd deadline: raise the debt ceiling, increase revenue, or decrease spending. Not surprisingly, things quickly devolved along party lines. Democrats suggested raising taxes while Republicans suggested slashing spending. Initial statements went something like this:
Democrats—Everything must be on the table, but you better not touch our Medicare or Social Security.
Republicans—Everything must be on the table, but don’t you dare raise our taxes.
Now by definition, everything should include, well, everything. But of course both groups have their own priorities and want to protect things that are important to their respective constituents. President Obama said he was willing to look at changes to Medicare and Social Security benefits, but House Minority Leader Nancy Pelosi quickly stepped in to say that cutting either entitlement program was unacceptable. Similarly, when a GOP leader suggested that it might be best to agree to some tax increases in the name of compromise, others recoiled at the notion.
Despite the whiplash-inducing switchbacks, points and counterpoints the negotiations have taken, what bothers me most is that the majority of the suggested changes I have read about, such as raising taxes or slashing spending/benefits, would not go into effect until after the 2012 elections. Coincidence—I think not. Personally, I believe that legislators were elected to make just these types of decisions, and they should be willing to put their positions on the line and stand by their decisions. Whatever changes are made, they should go into effect sooner rather than later. Then the American people can see for themselves the consequences of these decisions and vote accordingly in the next election.
As I said, I first wrote about this situation three weeks ago. Since then, what progress has been made? Unfortunately, very little has changed, and the new developments that have arisen have not been positive. A few days ago, Moody's—the credit rating agency—threatened to downgrade the country's AAA credit rating. The following day, ratings agency Standard & Poor’s threatened to do the same, citing a ’50-50 chance’ that they would lower the US rating within the next ninety days. If either agency follows through on its threat, the United States would lose its status as one of the most reliable borrowers of capital in the world. In response to these statements, the U.S. dollar tumbled against most major currencies, but ultimately recovered—at least for now. In addition, the stock market outlook is expected to be ‘volatile’ unless/until the debt ceiling impasse is resolved.
As the media covers all angles of the debt ceiling debate, there are a few things that have been treated as fact that are, in fact, not entirely accurate. First, some have argued that failing to raise the debt ceiling will result in an immediate default. This is untrue. According to the Bipartisan Policy Center, a think tank founded by retired Democrat and Republican Senators including Tom Daschle and Bob Dole, the federal government will receive about $172 billion and have bills totaling about $307 billion in August, leaving a shortfall of about $135 billion. In order to avoid a default, the Treasury Department must pay the interest on the treasury bills due in August, estimated to be $29 billion. Considering there will be $172 billion in revenue for the month, there should be no trouble paying this interest, which means avoiding default.
Next, the President has stated that if the debt ceiling is not increased, some Social Security payment checks may not go out on August 3rd. However, after paying off the interest on the debt, the Treasury will still have $143 billion remaining, more than enough to fully fund Social Security ($49 billion)—if the Treasury makes funding Social Security a top priority. So, if Social Security benefits were not paid, it would be because the Treasury chose not to fund them. Beyond that, the Treasury will have a tough time deciding which of the following areas receive funding: Medicare, Medicaid, defense vendors, unemployment, military active duty pay, Veterans Affairs, salary and benefits for federal employees—the list goes on and on.
It is with good reason that the term ‘draconian cuts’ has been tossed around to describe the changes to government spending that must be made going forward. We cannot continue to support our ever-expanding government. For example:
- Under President George W. Bush, the Department of Education doubled in size thanks to No Child Left Behind. Bush also introduced Medicare Plan D, the largest entitlement expansion in nearly fifty years.
- America currently spends nearly as much on defense as every other county on earth combined—basically half of the total of global defense spending. We spend billions keeping and maintaining foreign bases, and spend more inflation-adjusted dollars on the military today than at any time since the end of WWII.
- This past decade, in the aftermath of 9/11, the federal government has created or reconfigured 263 organizations all purportedly related to the war on terror. Incredibly, the dollar amount spent on intelligence is up by roughly 250%.
Increasing taxes will not make this spending issue go away. Even if we taxed the top 10% of income earners at 100% (literally taking their entire incomes), we would only get $3.4 trillion, and our debt is over $14 trillion and counting. Besides, we would only get that money once, because after taking all of their income, there would be nothing left to tax. Which high-earners would work as hard to make that much money the following year if they knew it was all going to be taken, and how would they earn that much with no residual income to spend or invest in the first place? As painful as it will be, sweeping cuts in spending will have to be made, even if we increase taxes.
The next two weeks will be pivotal in determining our nation’s future. Will we continue to spend money now and put off paying what we owe? Will we make the painful choices, deciding which programs will be fully funded and which will be funded partially, if at all? Or will our leaders in Washington find a way to meet in the middle? Time will tell, and unfortunately, time is something we cannot borrow indefinitely.
**Want to try your hand at solving the budget crisis?
Go to About.bgov.com to choose which federal programs you would fund, or go to WashingtonPost.com to share your ideas for where to cut the budget.