Beating the Dead Horse Once More: Looking at the Numbers if we Don’t Raise the Debt Ceiling

Some things are worth repeating.

July 15, 2011

Comments

One of the things that I am finding in various discussions about the debt ceiling debate is that a lot of people, including those who are intelligent and well-informed, simply do not know (or have not thought about) the immediate effects on federal spending (and their wider consequences) if the government is no longer able to borrow. I speaking here of the scenario that many are promoting that we can not raise the debt ceiling and still not default on the debt. This is technically true, but it not as simple as that, either. Even if we keep making interest payments, there are other very serious problems that will occur. Doug Mataconis tried to point this out the other day (and again, here), noting specifically a piece by David Frum. I would further suggest a piece by Megan McArdle. I would recommend all of the linked pieces.

And today, we can add Kevin Drum to the list of those who have done some back of the envelope calculations:

Let’s take a brief look at the numbers. The federal government is scheduled to spend about $300 billion in August. Something like $125 billion of that is debt. So if the debt ceiling doesn’t get raised, the government can only spend about $175 billion. Very roughly, here’s spending for the month of August in the areas Nan Hayworth says are off limits:

Social Security = $60 billion
Veterans benefits = $10 billion
Medicare/Medicaid = $70 billion
Interest payments = $20 billion
Military pay = $15 billion

Total = $175 billion

Which means:

There’s not a single dollar left for any other function of government. Not defense spending, not the FBI, not foreign embassies, not the court system, not prisons, not disaster relief, not unemployment insurance, not the border patrol, not TSA or the FAA, not roadbuilding, not maintenance of any kind, not national parks, and not pensions for retired federal workers. Not anything. And aside from military personnel, every single employee of the federal government will have to be furloughed.

And, of course, if every employee is furloughed, I am not sure who it is that is managing the SS, veteran’s checks, etc.

I bring this up yet again because I really do think that a lot of people who are well-meaning simply do not understand the stakes. I have had private conversations with such people who are sincerely concerned about our long-term fiscal situation and yet really had no idea as to the consequences of not raising the debt limit. When I was interviewed on a Florida talk radio program a few weeks back, the host repeatedly argued that we should not raise the debt ceiling and that the consequences would be manageable. However, I do not know how one can look at the numbers and think that this is the case.

Now, the consequences are sufficiently dire (and this doesn’t even get into the financial markets and the potential for Great Recession II) that surely a deal of some sort will be made. But the rhetoric and behavior out of Washington makes me wonder, I will confess.

I can understand why one might want a specific compromise to emerge from these negotiations. I can understand why one might might have a specific view on taxes or spending. I cannot understand, however, any arguments that we can actually get away with not raising the debt ceiling without dire consequences.

Indeed, all of these underscores the utterly ridiculous nature of this law and why I would get rid of it if I could. As has been noted on numerous times, this is an almost unique legal requirement:

Only Denmark has a fixed debt limit comparable to that of the U.S. There, the debt limit is raised through legislation in a separate action from the annual budget process. In Denmark, however, the debt limit is set at a level so high that the ability of debt managers to issue payments is not inhibited.

The congresses of other countries such as Canada and Sweden approve borrowing authority, but it is in connection with the approval of annual budget decisions.

The United Kingdom, New Zealand, and other countries delegate even broader authority to their treasury departments to borrow in the public interest. But because these countries have parliamentary systems of government, issues such as borrowing money to fund the government usually require significantly less deliberation.

Source

Really, since the Congress sets spending, it has already declared via law whether we are going to have to borrow or not. The debt ceiling is an artificial impediment to the overall process.

Further, it doesn’t even function as designed. See Sarah Binder (an expert on the Congress) over at the Monkey Cage for some background: Why do we have a debt ceiling?

So, I am curious: who thinks that it would be a good idea to not raise the debt ceiling?

28 responses to “Beating the Dead Horse Once More: Looking at the Numbers if we Don’t Raise the Debt Ceiling”

mattb

July 15, 2011 at 11:37 am

As each day passes, I think a momentary debt — or at least a real market scare — is inevitable. Manufactured crisis or not, it seems that the issue of the debt ceiling is perhaps the most existential problem faced by the current administration.

The fact that the House Republican’s position is that “their compromise is approving the limit” and that will only come with spending cuts, has place the Administration — and to a lesser degree the Democrats — is a position where they either give in (and demonstrate that when push comes to shove, they’re the ones that will always move back) or risk the crash.

If the go status quo — give in — I think that it will be a further nail in the coffin of a second term as nothing changes and the Republicans can claim victory.

And from a political and governing perspective, it pretty much defangs them (and empowers the tea party caucus) as well. Irresponsible or not, it seems like the smart thing to do is to hold their ground, and if the Republicans won’t budge or go with the McConnell plan, let the chips fall.
mattb

July 15, 2011 at 11:43 am

(Sigh — ran out of time in editor — here’s a corrected version of the previous post)

As each day passes, I think a momentary default — or at least a real market scare — becomes increasingly inevitable.

Manufactured crisis or not, the issue of the debt ceiling is perhaps the most existential problem faced by the current administration. And it may become the administration’s defining moment (as opposed to health care or Bin Laden)

The House Republican’s position is “our compromise is approving the limit” provided there are only spending cuts, has place the Administration — and to a lesser degree the Democrats — in a position where they either give in (and demonstrate that when push comes to shove, they’re the ones that will always move back) or risk the crash.

If they go with the “status quo” — give in — it will be a further nail in the coffin of a second term as nothing changes and the Republicans claim victory.

So from a political and governing perspective, a “cuts only” agreement pretty much defangs the President and the Dems (and empowers the tea party caucus) as well.

On the other hand, if there is a crash, I think the Republicans own in — especially since so much of conservative media is actively calling for a crash. Explaining that the government could pay for these services — regardless of whether its right or not — without default is the more complex position (and therefore will fail to pick up broad public traction).

Irresponsible or not, it seems like the smart thing to do is to hold their ground, and if the Republicans won’t budge or go with the McConnell plan, let the chips fall.
mike

July 15, 2011 at 11:44 am

i don’t thinkit would be a good idea – i think it would be a good idea to raise taxes – I agree with you that we have to come up with the money – we can’t just not have it – but i don’t agree on how to do it
john personna

July 15, 2011 at 12:08 pm

“Dead horse” indeed. Most people here get it, and most who don’t get it are beyond your reach.
Steven L. Taylor

July 15, 2011 at 12:12 pm

@john personna: Very possibly. However, recent encounters, as noted in passing in the post, have made me wonder as to how many people have actually looked at the numbers.
Steve Verdon

July 15, 2011 at 12:15 pm

I bring this up yet again because I really do think that a lot of people who are well-meaning simply do not understand the stakes. I have had private conversations with such people who are sincerely concerned about our long-term fiscal situation and yet really had no idea as to the consequences of not raising the debt limit.

I’ve been concerned about our fiscal situation for a very long time. Well before it was fashionable on the Right (and just to be clear I’m not on the Right–they’d hate my stance on teh Gays, abortion, drugs, and prostitution). My position has been:

1. Raise the f*cking debt ceiling already.
2. We need to raise taxes, maybe not right this second, but we need to look at increasing revenue and sooner rather than later.
3. We need to cut spending, specifically Medicare and Social Security, and by that I mean things like means testing, changing COLA adjustments, etc. Altering the growth rates, and then if necessary reducing payments.
4. More economic growth–and I’m still fairly convinced that our problem is lack of investment/uncertainty.

That is what I see as the most reasonable approach to the problems we face. Will we get any of this? F*ck no. This is a democracy people, the only form of government that ensures that people get exactly what they ask for good and hard.
DMan

July 15, 2011 at 12:19 pm

Seems like the supporters of the crazy movement are going quiet around here suddenly. One hopes they use this as a time of reflection and begin to question their rigid tribalism. I imagine for most it’s strategic silence, likened to the death of the birther movement a few months back.
mattb

July 15, 2011 at 12:21 pm

@Steven & @John,

The sad truth is that, for example, immediately under the link to this post in the “Conservative Blog Network” side bar is another entitled “Clearing Up Some Debt-ceiling Misconceptions” which links to a Myth-busting article by Deroy Murdoch at the NRO which includes ditty’s like:

Congress should not hike the debt limit, period. The staggering sum of $14.3 trillion should remain the Everest of U.S. financial irresponsibility from which Uncle Sam must descend. This will be arduous but far healthier than climbing into ever-more-vertiginous debt and triggering an all-consuming avalanche of unpayable bills.

Furthermore, the notion that leaving the debt limit intact will trigger default is another monstrous lie designed to bamboozle the American public and cow Republicans into retreat. As with a credit card, default means neglecting one’s bills rather than respecting a debt cap. If Visa refuses to augment a customer’s credit line, default occurs only if he stops making minimum payments. Indeed, as his balance drops, his credit rating improves.
Steven L. Taylor

July 15, 2011 at 12:25 pm

@Steve Verdon: I concur with your list. And I fear you are right about whether we get it or not.
Stormy Dragon

July 15, 2011 at 12:29 pm

I’m starting to think that the administration’s mistake was holding off all consequences of not raising the debt ceiling until August 2, when they all occur at once, under the mistaken assumption Republicans were bargaining in good faith and just needed more time.

He should have started refusing payments as soon as the ceiling was hit, and over the last month gradually ratcheting up more and more stuff to not be paid. This would have given the delusion a change to feel the pain and come to their senses before the full on crisis occurred.
mike

July 15, 2011 at 12:52 pm

I am glad you posted a breakdown of the numbers b/c i did not know how much was eaten up by the big few expenditures and how little/none was left over for the rest. I agree that the president should, in anticipation of not having any money on the 2nd, start shutting down government sectors as a demonstration of things to come when there is no money – this will spur something to be done.

Again, one way or another, taxes will have to be raised. I want to see see huge cuts esp in the military – 1st with ending the wars but these are only short term – but tax increases are necessary as well as much as I am cheap and will get hit by them b/c I am right in the upper middle class
Rick DeMent

July 15, 2011 at 1:27 pm

This uncertain thing is stating to get irritating. US companies have done very well under the reign of fear. Longer working hours for, lower wages, I mean god it’s god damn employer paradise. Why wold they invest? And the biggest driver of uncertainty is the GOP… Blocking , stalling, court fights, and basically not doing anything remotely productive other then playing one two and a half year long game of politics trying to wreck whatever it is Obama is trying to do.
Steven L. Taylor

July 15, 2011 at 1:33 pm

@Rick DeMent: I must concur that the whole “uncertainty” bit was unconvincing to me before the current debt ceiling brouhaha, but now I don’t want to hear any GOPers tell me how uncertainty is our main problem after all of this. If we need to cut down on uncertainty, then we should have raised the debt limit some time ago.
Liberty60

July 15, 2011 at 1:33 pm

As long as we are beating horses…

Here is the back-of-the-envelope summary of our budget (numbers are from 2010, so current ones would be escalated some):

Defense/ Homeland Security: $1.0 trillion
Social Security: $1.0 Trillion
Medicare: $0.6 Trillion
Debt Service: $0.4 Trillion
Everything Else: $0.5 Trillion

Total Spending: $3.5 Trillion
Revenue: $2.1 Trillion
Deficit: $1.4 Trillion

I keep flogging these numbers, to point out the utter BS coming from the Right about “MASSIVE CUTS”; looking at these numbers makes it instantly clear why no conservative will dare put together a coherent budget, because almost all of the spending occurs in areas that no one, not even the Tea Partiers themselves want to cut.

Again- “Fiscal Conservatives”, please refudiate my numbers.
ratufa

July 15, 2011 at 1:45 pm

This has a pretty good (and concise) analysis of what would happen if the debt ceiling isn’t raised by the August deadline:

http://www.bipartisanpolicy.org/sites/default/files/Debt%20Ceiling%20Analysis%20FINAL_0.pdf
charles austin

July 15, 2011 at 2:14 pm

I only have two quibbles with Steve Verdon’s list.

1. I have said before (no really, I have) that the debt ceiling should be raised. But it does raise the question of how much it should be raised. Enough to buy a few months of negotiating time? Enough to get us through six months? Enough to get us through the current fiscal year? Enough to get us to November 6, 2012? Or to, say, $30T so we won’t have to address this again for perhaps 10-15 years. Note that the last option is equivalent to every man, woman, and child in the US having a debt of $100,000 on the books. Not especially appealing, but there it is. Assuming you can borrow that much and maintain rates where they are, that’s still about $15,000 per household per year just to service the debt by around 2025.

2. I would exchange items 2 and 3 in order of importance. We probably cannot solve the debt problem merely through cuts but we certainly cannot solve it merely by raising taxes.

Dr. Taylor, I sort of hate to bring this up, but the uncertainty issue is there every single day for us small biznessmen as it relates to credit, hiring, taxes, and regulation. I believe your perception that it is not consistent for me to believe that while raging against the various proposals offered by the Obama administration or my friends on the Left to “solve” the debt problem their way or default while noting the uncertainty described in the previous sentence is not correct. Perhaps I am wrong about the debt problem, but that in no way affects the other uncertainties. I would also note that IMHO, all I see offered by Obama and the Left are more band-aids, even if they may cover the open wounds for up to 10 years, or at least until the next election.

Just to kick that dead horse one more time, the debt ceiling and the debt problem are not the same thing. I don’t think anyone serious wants to not raise the debt ceiling but there is some gamesmanship regarding how much to raise it and whether to have some cuts and some taxes, or some cuts and no taxes, or some taxes and no cuts. Frankly, IMHO, Congressman Ryan’s plan doesn’t do enough to deal with the debt problem, so as you can imagine, I think even less of the Obama adminstration’s demogoguery on the subject.

One side note, the fascination with 10 year projections of costs, savings and benefits that has become all the rage is part of the problem, just like baseline budgeting, off budget items, and other accounting tricks. It only serves to give an exaggerated view of costs or savings and then ignores the abyss it usually leaves on the edge of, not that I want to end a sentence with a preposition.
An Interested Party

July 15, 2011 at 2:53 pm

Dr. Taylor, I sort of hate to bring this up, but the uncertainty issue is there every single day for us small biznessmen as it relates to credit, hiring, taxes, and regulation.

Retort at the 3:45 mark…
James

July 15, 2011 at 2:57 pm

@charles austin:

Enough to buy a few months of negotiating time? Enough to get us through six months?

This is the United States of America. We don’t deal with our affairs in 3 to 6 month increments.

[…] the uncertainty issue is there every single day for us small biznessmen [sic] as it relates to credit, hiring, taxes, and regulation.

This uncertainty meme would be so much more humorous if it weren’t so robust. The biggest issue facing small businesses right now, and the American economy overall, is the massive shortfall in demand. Less people are buying stuff. Business revenues are down and people are being laid off as a result. Those laid off workers in turn, are cutting back their spending and the vicious cycle continues.

That’s why the 100% spending cut demands being made by the House Republicans is so insane. They’re holding the US economy hostage to extract maximal policy concessions. Policy concession that, if enacted into law, will inflict their own damage to the US economy.
charles austin

July 15, 2011 at 3:15 pm

An Interested Party, yeah, that Bill Maher is a dispassionate, objective source. Whatever. Not that I have read any comment you have made that would lead me to expect you to venture outside the echo chamber.

James (not Joyner), This is the United States of America! No doubt. So pick a number, or just stand back and throw rocks at some carefully excerpted part of what I said that you feel certain you can deconstruct. Whatever.

But seriously, how many people commenting here besides perhaps Drew and myself may actually hire someone this year? And by hire I mean put them on your payroll. Anyone? Anyone at all? So who’s just parroting talking points or theory versus being in the arena and actually having to deal with these issues? Anyone recall Theodore Roosevelt’s comments about that?

You are, or course, entitled to your opinions. I freely admit that I don’t have a lot of answers, but I do have a lot of questions based upon my empirical experience and knowledge of theory and philosophy that I don’t see anyone offering answers to. Damn, just can’t get away from ending sentences with prepositions.
Steven L. Taylor

July 15, 2011 at 3:26 pm

@charles austin:

how many people commenting here besides perhaps Drew and myself may actually hire someone this year? And by hire I mean put them on your payroll. Anyone? Anyone at all?

Well I guess that means your word is the end of it. No need for arguments or evidence.
Rob in CT

July 15, 2011 at 3:32 pm

@charles austin:

Not this year, but I hired somebody last year. Does that mean I get to discuss this topic? Of course, I’m not a businessman, but whatever.

I’ve seen poll data on this. Small business people were asked about things like taxes & regulation (aka “uncertainty) and, you know, DEMAND. Guess which one was the overwhelming factor cited as the driver for their decision-making? It starts with a D…
Steven L. Taylor

July 15, 2011 at 3:33 pm

@Steven L. Taylor: And out of curiosity: what kind of small business are you in?

And are you really going to argue that the main problem facing small business is uncertainty about taxes and regulations over demand for the product or service that the business in question provides? Really?
john personna

July 15, 2011 at 3:40 pm

And by hire I mean put them on your payroll. Anyone? Anyone at all?

Heh, I’m only a Capitalist.
Liberty60

July 15, 2011 at 4:46 pm

I am a midlevel manager at a midsize architecture firm, and my specific job description is to ~~agitate the proletariat~~ manage projects to profitability and in the course of this, I have hired and fired people and other consulting firms.

Which I guess is my golden ticket to the John Galt Ubermensch Bidnezz Roundtable.

We paid less in taxes last year than the net profit we earned on a single project.

Except that the number of projects dropped drastically, due to a lack of design need from developers, who have a decline in demand for new houses and offices. (really, its a fact- something that gets published in newspapers and even the Internet).

Anyways, these breathless offers from Wingnuttia to lower our crushing tax burden are treated by us Serious Businessmen (as opposed to worthless parasites at think tanks like Heritage Foundation) as a sick joke; dropping our taxes to zero would not result in us hiring a single person- what the eff would we hire him to do, sit around and play Angry Birds?

But a revival of demand would result in us winning a few new projects, and then we would need to staff up, and hire at least a couple new people.

We would happily pay a small tax increase if only we could be busy again.

End communique from Galt’s Gulch.
An Interested Party

July 15, 2011 at 6:36 pm

Not that I have read any comment you have made that would lead me to expect you to venture outside the echo chamber.

This from someone who lives in his own echo chamber…Maher’s point still stands though…it’s rather amusing how you and people like you act like innocent waifs who are just so sensitive and have to be treated like little scared exotic birds or else you’ll be startled and fly away with all your magic eggs full of jobs…you poor thing…
john personna

July 15, 2011 at 7:19 pm

As regards Steve’s item 4, growth, I was reading something interesting recently which said we are all too accepting of a US- centric growth equation.

“globalization” or “imbalances” or whatever you call it, might have more to do with what happens after you clear the decks, if you ever do.
charles austin

July 15, 2011 at 7:22 pm

Rob in CT, thanks.

Dr. Taylor, My aren’t we snippy. I didn’t mean to imply that my word was dispositive, but merely that the casual dismisiveness of my experiences are perhaps unwarranted. For whatever reason you choose to respond to me in a hostile snarky manner, as is your right. Perhaps I deserve it.

In my humble opinion, the biggest challenge my small businesses faces today is the tightening of credit. I’d offer an opinion as to why that is, but what do I know? I am familair with any other number of small businesses, but do you really care what I think or know about them?

Thank you though. I can accept that I have no place here. See you in the caption contests.
Steven Taylor

July 15, 2011 at 7:31 pm

@charles austin: All I am asking for is actual evidence and argument nit an appeal to the fact that you are in a small business (the type of which you never even identify, making it rather difficult to even evaluate your claims).