The Debt Limit is Back

Posted in Politics
Mon, Mar 16 - 7:48 pm EDT | 1 year ago by
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Congress last year suspended the statutory limit that prohibits adding new debt above an established threshold, but that suspension only lasted until March 16. Now the debt limit is back in force, and that means the federal government is once again tasked with choosing from an array of potential fiscal solutions to resolve the situation.

Treasury Building
Source: Shutterstock

We can expect a return of manufactured hysteria and predictions of impending financial doom, so it’s first necessary to clear up a common myth about what it means to hit the debt limit. It does not mean that the federal government is going to default on its obligations, as some partisans and their media allies claim. Even with the debt limit reached tax revenues will continue to come in, and there is an ample amount to provide for the payment of government obligations.

Default occurs when debt to creditors is not paid, not simply when there isn’t money to pay for all the programs that the government has previously authorized. Government creditors are bond holders, who receive interest payments in return for loaning the government money. Interest payments are expected to be about $227 billion this year, while the government will rake in over $3 trillion in tax revenues. Last time I checked, $3 trillion is greater than $227 billion. Heck, there’s probably enough to even pay Social Security recipients, too.

The Treasury Department will make this sound more complicated than it is, and hem and haw about the “extraordinary measures” they will have to take to adjust their overly-complicated bureaucracy and outdated systems. Or they’ll pretend to be completely incompetent and not at all acknowledge that they can prioritize payments to creditors to avoid default. But at the end of the day, everyone knows they are just providing political cover for the administration to demand that Congress raise the limit without providing any spending concessions in return.

None of this is to say that the debt limit doesn’t need to be address, simply that there will be no lasting repercussions end if it doesn’t happen tomorrow. Or next week. Or even next month.

The most fiscally prudent solution would be to balance the budget and no longer need to borrow from the next generation so that we can overspend today. But even the most aggressive balancing plan would take years to completely eliminate the deficit, so the current limit would still need to be addressed. Though if a balanced budget agreement was reached, a temporary increase in the debt limit during the transition period would be a foregone conclusion.

Unfortunately, there’s zero change of that happening under President Obama. The question then for advocates of limited government is whether it makes tactical sense to engage in this particular battle or not. There are both pros and cons.

On the one hand, any opportunity to both draw attention to excessive government and force the administration to the table – whether through the budget, appropriations, or the debt limit – is a chance to win spending concessions. On the other hand, widespread public ignorance of what the debt limit entails and what happens when it is reached, along with a sycophantic media willing to carry the administration’s water, provides opportunity for fear-mongering.

Now that Republicans control both branches of Congress and Harry Reid’s iron fist is no longer prohibiting Senate participation, there’s opportunity for a real budget debate. That allows Republicans to debate spending without requiring it happen within the confines of a more politically vulnerable debt limit fight. So expect Republicans to play it cautious and after a bit of posturing to either simply raise the limit or, perhaps more likely, kick the can down the road through another suspension.

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