Raising the Debt Limit: Truth, Lies and Damned Lies

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By George Noga
More Liberty, Less Government


Titanic Redux; Library Effect; and the Trajectory of Spending

Go back 100 years to April 1912. Obama is captain of the Titanic; only this time he has 21st century technology. He knows precisely where the icebergs are; nevertheless, he hits the same iceberg and the ship sinks. Thus it is with raising the federal debt ceiling. Obama knows where the icebergs are and about when he will hit one; nonetheless, he refuses to alter course. Never before has any potentially existential crisis been so predictable, preventable and unnecessary!

“Captain Obama knows where the icebergs are but refuses to alter course. The end result will be America’s most predictable, preventable and unnecessary crisis.”

The opposing strategies are clear. The Obama-Geithner-Schumer plan is to: (1) cry wolf and claim we will be devoured unless the debt ceiling is raised; (2) demand a no-strings-attached increase; (3) blame the opposition for any impediments; (4) threaten to default on the debt, stop social security payments and otherwise inflict the most pain possible; and (5) engage in thermonuclear class warfare. The fiscally responsible goal should be to change permanently the trajectory of spending and to reform the entire budget process. Obfuscation, hyperbole and false choices are at a premium; therefore, let’s separate the truth from the lies and the damned lies.

Lies and Damned Lies

The most damnable lie is if the debt limit is not raised there will be an unspeakable global crisis. The truth is 180º opposite, i.e. the crisis will come if we continue business as usual. Another lie is the Republican (Ryan) plan is radical and extreme. In truth it is a gradual, manageable and measured approach albeit insufficient. Its main virtue is it lowers the trajectory of spending and buys limited time to craft a complete solution.

Another damnable lie is failure to extend the debt will result in default, no social security checks and (insert your own) horror stories. This is standard, progressive big-government misdirection; I call it the library effect. When faced with putative budget cuts, local governments first threaten to close libraries and schools and to cut police and fire. In short, they intentionally punish constituents by cutting where it is most visible and harmful. The library effect now is on display at the federal level. In truth, no great harm is inevitable by failing to raise the debt limit.

Truth

If the trajectory of spending is not permanently lowered now, the next possible opportunity will not come until early 2013 – after the 2012 election. Waiting 2 years will greatly exacerbate the problem and it may be too late. According to the marketplace, the USA’s debt already is downgraded to double A. The market price for credit default swaps on US sovereign debt is the same as other AA countries rather than AAA countries.

“In the marketplace, US sovereign debt already has been downgraded.”

The debt ceiling eventually will be increased; the issue is what we receive in exchange. Unless we obtain all or nearly all of the following, we the people should withhold our consent.

1. Spending must be put on a steep downward trajectory. This only can be accomplished if Medicare and Medicaid are converted from entitlements to block grants. It is impossible to achieve via one-time cuts, gimmicks, and discretionary spending.

2. The spending cuts must begin immediately; they cannot be back-end loaded.

3. There can be no tax increases. It is proven that higher tax rates do not increase tax collections while killing the economy. Also, higher taxes tend to be permanent while spending cuts are phantom and soon reinstated.

4. The budget process must be reformed. Each Congress should pass a 2-year budget by a fixed date; if it fails, all other business ceases until a budget is passed.

5. Automatic cuts, sequestrations and rescissions are imposed if spending increases more than inflation and population growth.

6. There must be a long term solution; otherwise it will happen again. We must cap the ratio of US government debt to GDP at no more than 50% (ideally less) by a time certain.

Buckle your seat belts; we are in for demagoguery and class warfare the likes of which you never have seen. If there is a government shutdown, which side the people come down on and who they blame will determine how it all ends. If we fail, you need to keep your seat belts buckled because there is an iceberg in your future.

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