Wednesday, September 18, 2013

More background on the debt ceiling and deficit

I promised to post some additional thoughts about the deficit and debt ceiling.  Here they are.  I’ve included a number of links where you can read more and view related charts.

Clarification on Obama and the debt ceiling.

I’ve had some comments about Obama’s previous stance on raising the debt ceiling.  Some referenced his opposition to raising the debt ceiling during the 2008 campaign.  I didn’t find that.  I did find a video where he discusses the federal debt/deficit, but that is different from the issue of raising the debt ceiling.  In his 2008 campaign, Obama did say that Bush’s fighting two unnecessary wars and driving up debt was irresponsible.  However, he was discussing the issue of the federal debt NOT the issue of the debt ceiling which are two entirely different things.  See video here:

Apparently Obama did however vote against raising the debt ceiling as Senator in March of 2006 as a protest against Bush policies.  He said in a speech on the Senate floor at that time:  "The fact that we are here today to debate raising America's debt limit is a sign of leadership failure. ... Increasing America's debt weakens us domestically and internationally. Leadership means that 'the buck stops here.' Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem."  Later, Obama said he regretted that vote and his statement and his understanding of the potential for harm to the country from NOT raising the debt ceiling convinced him that the debt ceiling wasn’t the proper way to protest administration policies.  In short, no wonder many Americans are confused about the difference between the debt and debt ceiling.  Even Senators who become future Presidents can get it wrong.  Read more at these links:

Why is raising the debt ceiling important and how does it relate to the deficit?

In a 2011 report, the U.S. General Accounting Office (GAO) said this about the issue of raising the debt limit/ceiling and its impact on the federal debt/deficit.  I’ve highlighted two important points that the GAO makes. 

The debt limit does not control or limit the ability of the federal government to run deficits or incur obligations. Rather, it is a limit on the ability to pay bills incurred. The decisions that create the need to borrow are made separately from—and generally earlier than—the decision about the debt limit. Debates surrounding the debt limit may raise awareness about the federal government’s current debt trajectory and also provide Congress with an opportunity to debate the fiscal policy decisions driving that trajectory. However, since this debate generally occurs after tax and spending decisions have been enacted into law, Congress has a narrower range of options to effect an immediate change to fiscal policy decisions and hence to federal debt.

Failure to raise the debt limit could lead to serious negative consequences in the Treasury market and for the ability of the United States to finance federal debt at the lowest cost over time. Any delay in raising the debt limit that affects Treasury’s regular and predictable schedule of auctions can create uncertainty in the Treasury market. So too some of the actions Treasury takes to manage the amount of debt near the debt limit, such as reducing the size of auctions, can compromise the certainty of supply that Treasury relies on to achieve the lowest borrowing cost over time. This uncertainty can, in turn, raise the cost of financing the federal debt.

You can read the GAO report here:

First, as the GAO says, the debt ceiling is not a means for controlling government spending or federal debt/deficits.  Second, NOT RAISING the debt ceiling INCREASES the deficit by INCREASING FEDERAL BORROWING COSTS over time.  In short, if you are really concerned about the deficit and government spending, the last thing you would want to do is NOT RAISE the debt ceiling because you will just be making government operating costs HIGHER because of INCREASED BORROWING COSTS.  And, NO.  Like many businesses the government CANNOT operate very well without BORROWING because the timing of receipt of federal revenues and expenses/bills coming due don’t always coincide.  It is the same cash flow problem many (perhaps most) businesses encounter when they have regularly recurring expenses but peaks and valleys in revenues which may require the business to have a short term line of credit.

The New York Times has provided some answers to questions people have about the U.S. debt and the debt ceiling.  The Times article is here and well-worth reading.

The Times article makes an number of important points, particularly this one.

The debt ceiling “must be raised if the United States is to pay for all the things that Congress has already bought: the spending in the budget bills it has already passed, the Social Security checks promised to retirees, the payments due to private companies with federal contracts and the interest on bonds it has sold.”  Let’s say you run a business and you provide a service or sell a product to the federal government.  For example, you manufacture firearms and have a contract with the federal government to provide guns for U.S. Marshalls.  You have shipped the guns and are waiting on payment.  If the debt ceiling isn’t raised, you might not be paid on time.  Not raising the debt ceiling doesn’t cancel you contract or the obligation of the federal government to pay you for the guns you have already supplied.  Let’s say you are a member of the military.  You are entitled to a paycheck.  However, if the debt ceiling isn’t raised, you may not get paid on time.  That is going to be tough on your family.  Suppose you are a doctor and you accept Medicare patients.  You have treated a senior citizen on Medicare and sent the bill to Medicare.  If the debt ceiling isn’t raised, Medicare might not process your claim on time.  You are a student relying on a Pell grant.  If the debt ceiling, you might not get the funds you need to continue your education or the funds might be delayed.  You own a government bond that is coming due.  You are entitled to your principal and interest for the loan you made to the federal government.  You might not get what you are due or the payments might be delayed.  These are the kinds of real world problems NOT RAISING the debt ceiling would cause.  AND, NOT RAISING the debt ceiling would NOT REDUCE the deficit by a dime.

What are the primary causes of the federal deficit?

So, why has the deficit grown.  The simple reason is Congress, particularly Republicans in Congress who pushed through tax cuts that reduced federal revenues far below the level needed to pay for programs and policies Congress adopted, particular at the time when the U.S. was getting involved in two expensive wars.  This mistake led to more serious deficits when a severe recession led to a significant drop in federal revenues as people lost their jobs (so they no longer paid payroll taxes), demanded increased social services like unemployment insurance and companies cutback.

The Bush area tax cuts that reduced revenues coupled with increased spending on social support programs such as unemployment insurance, food stamps and people starting Social Security early because of the recession are the primary reasons for increased deficits both now and in the future.  Much of this spending on social support programs automatically kicked in.  For example, when unemployment increases during a recession, more people apply for things like unemployment insurance and food stamps and Medicaid.  People who have reached retirement age who might have continued working retire earlier than they would have during a recession.  The Obama stimulus represents only a small share of the increase in debt and its impact on driving up the deficit was temporary.  Anyway, the stimulus saved jobs and very likely helped to hold down spending since people who would have otherwise lost their jobs due to the recession were able to continue working.  And, contrary to what some Republicans argue the increase in the deficit has not been driven by runaway spending.  Federal spending increased 11.2% during Obama’s first term versus 33% in GW’s first term and 34% during his second term.  The increase during Obama’s first term was driven primarily by things—such as increased demand for unemployment insurance—over which the President and, even Congress, had little control.  The increases during GW’s first and second terms were driven by tax cuts that went primarily to the rich and wars that turned out to be unwise and unnecessary.  Additionally, GW inherited a booming economy and left one in shambles.  Obama inherited an economy on life support and by the end of his first term had placed the economy on a trajectory of slow but sustained improvement.  Additionally, he accomplished this in spite of determined opposition from the Republican party whose members devoted themselves to sustained obstruction even when the policies they were obstructing were widely seen as beneficial and even necessary for rapid economic recovery.  Read more at these links

What future deficits are we likely to see?

The Congressional Budget Office has issued revised projections of the federal debt through 2023 which show that the deficit is expected to remain about where it is now as a percentage of GDP at about 71.1% of GDP compared to 72.5% this year.  Obviously, it would be better if the debt to GDP ratio returned to the 39% level we averaged over the last four decades.  However, it is not horrible during this time period given the fact that we have an aging population and Republicans refuse to return to 1950s/1960s tax levels that would allow us to collect revenues we badly need.  I would note that if ALL of the Bush tax cuts had been allowed to expire last January instead of just those for the very rich, we could have brought federal debt down to as little as 52% of GDP.  As it stands now, with most of the Bush tax cuts made permanent and without some kind of increase in revenues, federal debt as a percent of GDP may start increasing rapidly after 2023 reaching perhaps 100% by 2034.  And, NO, we cannot bring that down through spending cuts alone.  We need a combination of strategic spending cuts, cuts that will have minimum impact on our ability to grow the economy and the most vulnerable (children, the poor, the disabled, seniors, etc.), and revenue increases that fall primarily on individuals and corporations that can afford to pay a little more, segments of the economy that have benefited most from Bush’s unwise tax cuts.  All Americans will have to experience some pain and inconvenience but it is doable if we can have a rational discussion and bipartisan effort, neither of which unfortunately are likely in the current political environment.  Read more at these links:


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