Hitting our Heads on the Debt Ceiling

Sometimes we’re a bunch of idiots. As a nation I mean, not so much as individuals (though some would certainly qualify). I’ve seen people advocating for not raising the debt ceiling and I honestly understand the frustration that leads to that argument. Those who advocate this position are really just upset that the country is carrying a deficit and going deeper into debt every day. They are thinking that $14.3 Trillion is an unimaginable sum and scratching their heads as to why the ceiling would need to be raised even further. They figure that by not raising the ceiling, it will force the government to reign in spending and balance the budget. Unfortunately, this simply isn’t true.

No matter what the final budget that comes out of Washington this year looks like, nothing changes the fact that we’ve already budgeted for the current year, and unless it’s raised, we’re going to hit debt ceiling. In fact, we already have, but Treasury Secretary Geithner took action to “create additional headroom” so that the department could continue to fund obligations and effectively extending the deadline to August 2. These are “measures” such as raiding government retirement funds for their treasury bonds. This is not good.

President Obama knows this is playing with fire saying:

“The full faith and credit of the United States is the underpinning not only of our way of life, it’s also the underpinning of a global financial system. We could actually have a reprise of a financial crisis, if we play this too close to the line….”

Federal Reserve Chairman Ben Bernanke is also sounding the alarm, noting a failure to raise the ceiling could cause:

“severe disruptions in financial markets,”

Even former Fed Chair and fiscal conservative guru Alan Greenspan says in plain English that he’s “scared” and calls the games being played over the debt ceiling an:

“extraordinarily dangerous problem for this country.”

Okay, but why is this such dangerous stuff? Why doesn’t it make sense to enforce the ceiling and let the government slash everything they need to in order to regain fiscal sanity?

I don’t want to sound alarmist here, but this really is important. There are real consequences to not raising the debt ceiling that would impact everyone in this country, potentially setting us back to the the great depression. Our country is already in trouble with a sluggish economy and huge levels of unemployment (myself included). Failure to raise the debt ceiling would cause credit rating agencies such as Moody’s and Standard & Poor’s to downgrade United States’ debt, just as they did on Monday to Greece’s. They did this because they felt that:

a default on some debt appears “increasingly likely.”

There are several negative consequences for us if this happens in the US. One is that the cost of borrowing will increase so that those lending us money, such as Japan, China and the UK, will demand (and be able to get) a higher rate of return in exchange for taking on the now riskier debt. This is also true for individual bondholders, companies who invest in T-bills, etc. Some large bondholders may, if the situation gets dire enough (although I don’t think it will), unload some or all of their US debt, causing a spike in the interest rate.

Another consequence is that the US government itself, the largest holder of Treasury bonds, with about $8.5 Trillion invested in them, may start to dip into these bonds to pay debts. These bonds are currently being held in trust funds (see my last article which references how these differ from discretionary spending here) for things like Medicare, Medicaid and Social Security. Selling them would destabilize Social Security and wreak further havoc on an already underfunded Medicare/Medicaid system. It would also have the effect of flooding the bond market with securities that nobody would want to buy, further driving up the interest rate and thus the cost of debt.

A flood of Treasury securities on the market will spur the Federal Reserve to purchase bonds if they wish to keep the lending rate low, putting more money into the system and lowering the value of our currency. This would have a deleterious effect on our buying power as citizens and thus create a huge drag on the world economy. Nobody would want to hold US dollars because there would be increasing fear that a government default would erode the economy. This in turn causes a panic induced “sell” mindset among currency traders, pushing the value of the currency down.

If the Fed opts not to purchase the bonds, interest rates would skyrocket, causing a those who can even get a loan right now to defer. This would have the impact of further reducing economic expansion through business start ups or freezing demand based upon borrowing. Because of the above factors, the stock market would also likely plunge due to falling demand and skittish/risk averse investors not wanting to get soaked. Falling demand would in turn precipitate another round of layoffs because, contrary to conservative ideas, companies hire when there is more demand, not when taxes are cut.

If the debt ceiling is not raised, the government would either have to default or immediately fill an an estimated $125 Billion per month hole (most likely with cuts). This is equivalent to approximately 40% of government spending, a Tea Party wet dream. If this occurs, it will almost certainly effect all functions of the government causing mass layoffs which further damage the economy. Lower levels of employment also further reduce the tax base of the government and increase demand for government services such as Unemployment Insurance, food assistance, cash assistance, etc. It also has the effect of further reducing market demand since people without income will spend significantly less.

Unfortunately, this is exactly the approach the right wingers want to take. They are attempting to force us into a choice between austerity and default. Nobody really wants the latter because of the reasons outlined above, but to those who wish to “drown [government] in a bathtub“, the former is pure bliss. People like Grover Norquist would love to force this on us again and again in order to roll back the great society and new deal. They’re taking the nation hostage over it because it could, in “one fell swoop“, eliminate the programs that the right has been fighting for years. Programs such as Social Security, Medicare/Medicaid, Headstart, Pell Grants, etc. Programs that help the poor, elderly, weak and disabled. Programs that prevent many people from slipping out of the middle class.

These are the kinds of cuts that come as the strings attached to IMF bailouts. Why do you think they’re revolting in Greece?

Time and again, it has been shown that recessions are when government spending is most needed, and in fact increasing spending puts people back to work putting money into people’s pockets and increasing demand, thus healing the economy. When people have more money and have economic security, they will spend more, creating more demand and more demand means more jobs. This is Keynesian Economics, a well known and simple formula that was proven to work back in the 30’s and 40’s. This is a time when we need to increase government spending, not decrease it, even if it causes a larger deficit. This will help pull us out of this recession and bring us toward greater and broader prosperity, it worked during the Great Depression and there is no reason it wouldn’t work today. While our immediate deficit and the national debt are important long term concerns, we must take a more long term approach to them, incurring more debt now, but coming up with a solid plan to pay it off.

Those on the right want to convince us that that there are only two choices here, default or austerity, but this is a false choice. There is actually a third option, tax increases. If we are serious about paying off the debt, and I know I am, we must implement tax increases, such as the Schakowsky Plan, on those who make the most in our society. Those who make the most benefit the most from the infrastructure provided by our government, and should therefore pay more for the privilege of living under it. If the government wasn’t there with all the incumbent legal, military, police and judicial protection their money receives, these people would have their wealth stolen. In anarchy, the bandits wouldn’t head to the ghetto, so it’s only fair that those who are benefiting the most from the government pay more for it. It’s the only just way to eliminate our deficit and pay off our debt.

Cross Posted on Daily Kos

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Changing the Conversation on the Budget: An Idea for Good Governance

As a Precinct Committee Person for the Washington County Democrats, I’ve taken it upon myself to meet my neighbors and update their voter registrations. As I speak with people about various topics, including the budget, and as I’ve spoken with people in the past about the budget, it has become clear to me that virtually nobody knows what the budget actually looks like. People have their ideas, but they’re often skewed, misinformed or just plain wrong. This has an obvious negative impact on any budget discussion in our country. If people don’t know where their money is going, how can they effectively debate what should be done?

Part of the reason for this is an intentional mingling of all income and expenditures from all sources, even if taxes are raised and distributed independently from one another. Some examples of this are, Federal Insurance Contributions Act-Old Age, Survivors, & Disability Insurance (FICA-OASDI, commonly referred to as Social Security), FICA-Medicare, and Unemployment Insurance (UI). These funds are raised, administered and distributed as trusts, separately from the general budget. Unfortunately (from a clarity standpoint), these trust funds have been combined with other federal funds, resulting in a picture of the budget that looks like this. By combining these trusts with the general budget, it makes it appear that Defense is 18.74%, interest on the debt is 4.63%, and all the other departments of the government are only 19.89% of spending. This provides an inaccurate description of how our taxes are spent (and how they’re raised).

What happens when you separate the trust funds (aka. “mandatory spending”) from the rest of the budget? The Defense Department suddenly looks much more robust at 43.32% of “discretionary spending”. This is followed by interest on the debt at 10.7%. Everything else is a total of 45.98% (the next largest expenditure is for the Department of Health and Human Services at 5.13% and it shrinks substantially from there). Looking at discretionary spending will allow for a more honest debate about what we can/should cut and possibly where we need to raise more revenue.

But how can we educate people most effectively? That’s where the idea for a “tax receipt” comes in. The idea of a “tax receipt” is that the government should start sending out receipts that break down each taxpayer’s share of taxes into easy to understand information and graphic depictions. A simple mailing like you receive yearly from the Social Security Administration detailing your Social Security Account would be all that’s needed. It should separate out social security and medicare, showing personal contributions to each program and each program’s revenue and expenditures as well as projections into the future. This would give people the knowledge to address problems with these specific programs (or not touch them if they’re working). It should spell out what your amount of income tax paid was and how it was spent, line by line. This way, people could see that they spent, $XXX on the military, $YYY on veteran’s benefits, $ZZZ on highways, bridges and transportation, etc. This type of mailing should detail total revenues, disbursements, and projections into the future. It should also show the current and projected deficits, the national debt and “your portion”. Reigning in the debt is not a conservative issue, it is an American one and this would help clarify the conversation on how to do so.

A statement of this sort would help to redefine the debate, changing the focus and bringing the conversation out of the realm of the imaginary budget into the realm of the actual budget. If expenses were broken out so that it was obvious that the military is almost 45% of all discretionary spending, nearly equal to all other government spending on everything else, perhaps more people would see the need to cut it back.

This may even bring on more support for certain tax increases. It would help groups to point out that through tax breaks and loopholes, the wealthy are able to substantially lower their tax burden. It would also make the comparison more stark when someone looks at the total amount they pay compared to corporations. By using the tax receipts of wealthy people who are willing to pay more (like Warren Buffet), you could easily demonstrate the need to eliminate the cap on Social Security taxes and apply them to all sources of income. Currently FICA-OASDI (Social Security) taxes are only applied to the first $106,800 of “gross wages”, but does not apply to investment income (interest, dividends, capital gains).

There are many proposed solutions out there regarding raising taxes, but I like the Schakowsky Plan for adding new brackets for income above $1 Million. This would be a lot cheaper for the rich than the Eisenhower era tax brackets were, while providing stability to the system so they could continue their lifestyle. A tax receipt would help provide the knowledge base to balance the budget through this or other progressive means, such as those outlined in the People’s Budget.

As Jim Wallis said:

Budgets are moral documents.

We need to educate people on the facts if we want to establish a moral and just budget. This idea will help do just that.

Cross Posted on Daily Kos.