05 January, 2011

Raising the Debt Ceiling–Or, Why Everyone In Washington And The Media Has Lost Their Minds

This is going to be a long one.

Watch the clip (click the image) from Fox’s self-proclaimed libertarians, Glenn Beck and Judge Andrew Napolitano.

Here’s the thing, not raising the debt ceiling would create havoc that’s unimaginable.

First, we’re going to default on some of our financial obligations. That means no one is going to want to buy our stuff anymore unless it’s something they absolutely can’t get anywhere else. In the 21st century, there’s very little that falls into that category. They’ll still be willing to sell us stuff, but not for dollars. They’ll want gold or something with a definite tangible value.

Of course, if we can’t export, and we can’t use dollars to import, that’s going to kill the economy. Now, we’re just talking about defaulting on our new debt, not existing debt. But the interest rate will go up on the existing debt, thus increasing our financial obligations. And we won’t be able to meet the new obligations, so we’ll default on some more. That will in turn hurt the economy even more, which means the government will receive less revenue and will, in turn, have to default on more debt.

Countries have gone to war for less. We might suddenly find ourselves fighting a war on several fronts. One that it’s extremely doubtful we can win.

If we don’t raise the debt ceiling, we might as well hang up a big sign on all of our ports of entry that says “GOING OUT OF BUSINESS! EVERYTHING MUST GO!” Because that is what will happen. I know Beck and Napolitano are trying to say that we are in a horrible situation and we’re going to have to make hard choices and take some extreme actions to save ourselves. And some of these actions will likely create short term hardships, such as extending this recession.

And they’re right. And I don’t have a problem with that. I felt at the time, and still do feel, that it was a mistake to bail out the auto industry. I felt at the time, and still do feel, that TARP was a mistake.

But not increasing the debt ceiling isn’t going to create short term hardships. We’d be looking at a generation long recession. Maybe longer. You don’t save the country by destroying it.


These aren’t the only two people that have lost their minds.

Let’s look at President Barack Obama’s (D-USA) economic advisor, Austan Goolsbee.

As I say, that’s not a game. I don’t see why anybody’s talking about playing chicken with the…with the debt ceiling.

If…if we get to the point where you’ve damaged the full faith and credit of the United States, that would…that would be the first default in history caused purely by insanity.

The reasons why people, not just Beck and Napolitano, are talking about playing chicken with the debt ceiling, are a) there aren’t many other options left (I’ll explain that below), and b) “nyah, nyah…you started it!”.

Or, as Driscoll says in the above linked article:

Here’s a suggestion: If you don’t want people to play chicken with the debt ceiling, then DON’T PLAY CHICKEN WITH THE DEBT CEILING.

He’s absolutely correct. Goolsbee acts like this is all the Republicans fault and the situation here is a binary one. Raise the debt ceiling and accept our big government spending, or don’t. He makes no room for compromise.

Then Driscoll gives what he thinks Goolsbee should have said. The problem is that it’s just as dumb as what Goolsbee actually said.

Here is the correct answer to Jake Tapper’s question:

Jake, there is no possibility that the Congress of the United States will decline to meet the obligations of the United States. We share with the new majority in the House of Representatives a commitment to move toward a balanced budget in the months ahead. But there is no possibility that the Congress of the United States will decline to meet the obligations of the United States.

Ok, I’ve just attacked the Libertarian response to this problem, the Democratic response, and the Republican response.

Why? Because they’re all recipes for failure.

Look, the Democrats have put the Republicans in a no-win scenario. We have to cut spending, but we’re going to hit the debt ceiling before we have a chance to cut the spending. So, unless you want the havoc I described above, we’re going to have to raise it. I mentioned that back in November.

We’re also going to have to accept the fact that deficits are going to be extraordinarily high for a while, and that we may have to raise the debt ceiling again.

The problem with raising it, is that it’s like a heroin addict saying “just give me one more hit, and then I’ll go clean”. You might say to yourself, “let’s just raise it a little bit, long enough to fix some problems, and make it clear that we’re not going to raise it again.”

That’ll never work. See, the big spenders have all the leverage. There’s no incentive for them to stop spending. That scenario I described above is like a pair of Aces showing in 7 card stud. Once we fold, they know they have us beaten forever.

And that’s what’s wrong with Driscoll’s response. He wants us to fold one more time. Glenn is right about what happens then. It’s over. The Democrats have won. The country will still be destroyed though, just in a different way.

Megan McCardle recently examined the situation in Japan, in an article entitled “Japan and the Limits of Keynesianism

When I was starting out as a journalist, I frequently had Japan used to illustrate Adam Smith's precept that "there's a lot of ruin in a nation"; any time someone was tempted to get hysterical about government borrowing in America or elsewhere, someone else would inevitably point out that Japan's debt burden was well over 100% of GDP, and the country still hadn't collapsed.  But while there is a lot of ruin in a nation, there isn't actually an endless supply, and Japan may well be finally approaching the limits.


Japan has simply reached the limits of Keynesian policy in an economy which has never managed to jolt itself back up to a healthy rate of growth.  Demographics is obviously a big contributor to that slow growth, and there are a whole host of secondary factors one could nominate, but whatever the reason, they have now had two decades of anemic growth, which they have fitfully attempted to address with stimulus.  Maybe not enough stimulus, maybe badly designed, but they've certainly tried to follow the basic Keynesian playbook:  borrow money and spend it when times are bad, in the hopes that you can bring back growth.

But for Japan, at least, the growth has not materialized.  Few economists would advise undertaking a fiscal adjustment, on the scale that Japan requires, in the face of the current crisis.  The problem is, there hasn't been a good time for retrenchment in 20 years.  I can't blame the politicians for trying to restore some semblance of normal growth in the run-up to elections.  But at some point, they're going to have to cut back, whether or not it's a good time. 

So, the GOP finds themselves in a no-win scenario. They don’t have time to fix the spending problems before we hit the debt ceiling. If they raise the debt ceiling, they lose all leverage they have to lower spending keep from raising it any further and they send us further down Japan’s path. If they don’t raise the debt ceiling we get economic meltdown at the very least. Also, if they cave, they’re going to anger the fiscal conservative wave that got them elected in the first place.

But McCardle hits the crux of the matter for both Japan and the U.S. It’s not debt. It’s the debt to GDP ratio. And that’s what we should be limiting.

Japan’s debt to GDP ratio is obscenely high. Almost 200%.

Where’s ours?

2011 projection is about 95%. Not obscenely high, but still extremely high. I don’t think we want to trade economic situations with many of the countries who are higher than us. They include Zimbabwe, Japan, Lebanon, Greece, Italy, Iceland, and Belgium.

But, you say, hey, we’ve got quite a ways to go. We’re safe for a while. We can raise the debt some more.

I don’t think so.

Last year it was 83%. The year before 69%. The year before that 64%. So, we’re growing fast. And the projections are for the debt to explode over the next several years. We’ll likely catch up with Japan before the end of this decade. That’s where the spendthrifts (on both sides of the aisle) of this decade have sent us.

So, what can the GOP do?


Set the debt ceiling as a percentage of GDP, and require it to shrink.

Set it for 95% (or maybe 96% or even 97%) for this year. But in the resolution allowing this, also require that it shrink by x% (2, 3, 5, 10?) each year, until it’s at some predefined level (0%? That’s what the balanced budget folks would like. I like 30%, but I’m willing to listen to other numbers).

Then if Obama wants to have the debt at $20 trillion or higher, all he has to do is grow the economy to support it.

Also, doing it this way guarantees that either spending cuts or economic growth is going to have to occur, and fast. And by changing what we’re limiting, we escape out of the situation we’re currently in for long enough to actually do something about it, without blinking. We’re still facing those two up Aces, but instead of folding, we called and made it to the next round of betting.

Would such a plan work? I don’t know. But at least it’s not guaranteed not to work, like Beck’s, Goolsbee’s, and Driscoll’s plans. Like I said, we’re still facing those two up Aces. Frankly, we probably have to have control of the White House to solve this problem, but maybe this solution will allow us to stay in the game until we can kick the current occupant out.

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