It’s hard for the average taxpayer to stay abreast of the debt ceiling stalemate in Washington, D. C. It’s also extremely depressing! Every few minutes seems to supply fresh evidence of total government dysfunction.
Forget about the partisan food fight for the moment. Here's a basic primer on the big picture:
Q: How did the United States get into this ugly predicament?
A: The U.S. government has two sources of spending money: tax revenues and borrowed funds. About 40% of federal spending is now funded with borrowed money – i.e. sales of Treasury notes, bills, and bonds. This is not a secret. “Congress passes budgets and laws fully aware of the debt needed to finance these obligations,” says Joel Isaacson, a New York City financial adviser. “We’re in this predicament because the U.S. Treasury is not authorized to issue debt beyond a certain limit without the approval of Congress.”
By raising the debt ceiling, Congress allows the Treasury to borrow money to pay for financial commitments Congress has already made. Raising the debt ceiling doesn’t increase federal spending – it merely allows us to meet our current obligations. That's why until relatively recently, Congress treated raising the debt ceiling as a non-controversial formality.
Q: What is the purpose of the debt ceiling?
A: Theoretically, having to raise it discourages Congress from excessive spending.
But in reality, the debt ceiling may have the opposite effect, since politicians can approve popular social programs, expensive wars, and generous tax cuts, but defer confronting the fact that the debt ceiling must be raised to pay for them. Congressmen can (and do) vote in favor of increased spending ... and later vote against raising the debt limit to show everyone they believe the government spends too much.
It would certainly be more sensible to make decisions about borrowing in conjunction with decisions about spending and taxes, instead of after the fact. (More on the history of the debt ceiling here.)
Q: Why does the debt limit have to keep being raised?
A: Because the U. S. government spends more than it collects in taxes, and must borrow to make up the difference.
The federal deficit has increased under every president over the past 30 years. By far the biggest increase occurred under George W. Bush, who cut taxes and increased spending at the same time by fighting two wars and adding an expensive prescription drug benefit to Medicare. The federal deficit grew $6.1 trillion under President Bush. By contrast, the deficit increased $1.4 trillion under President Clinton, and has increased $2.4 trillion under President Obama.
As you can see in this chart, we could halt the growth in the federal deficit over the next decade just by letting the Bush-era tax cuts expire as originally intended.
Those were supposed to be temporary tax cuts. They pushed tax rates to historic lows -- and Congress approved them in 2001 and 2003 because the U.S. Treasury was then running a surplus. If they're allowed to expire, we return to the tax rates that we lived with under the Clinton Administration.
Q: Why do many economists say that the U.S. can’t solve its long-range budget deficit unless we cut government spending and raise taxes?
A: In a word, demographics.
Tea Party Republicans want to reduce federal government spending as a percentage of GDP to a level last seen in the mid-1960s – about 18% of the nation’s economic output. But as Robert Brownstein lucidly points out in the Atlantic, when Medicare began in 1966, it served about 19 million seniors. Today, the program serves nearly 48 million. Its trustees project that by 2035 that number will approach 86 million.
“Against that overwhelming demographic pressure, mandating that federal spending return to its 1966 level is like ordering the tide to reverse its course," writes Brownstein. "Sooner or later, the demands of providing for an aging society without gutting everything else that government does will require Washington to raise more revenue.”
But spending cuts are clearly necessary, too: “Unless Washington controls entitlement spending, especially by slowing the overall rise in health care costs, Social Security, Medicare, and Medicaid will impose unacceptable tax burdens on a working population shrinking in relative size,” he writes.
“Too many Democrats resist the need to restrain entitlements, and even more Republicans refuse to admit the need for more revenue. Yet only by moving on both fronts--beginning in the debt-ceiling standoff still convulsing the capital--can the nation go gray without falling dangerously into the red.”
(c) Lynn Brenner, All Rights Reserved.