Simon Williamson

Focus on spending, not the debt ceiling

2013-01-04 13:01

Simon Williamson

There is a fundamental misunderstanding around the world, including among people who cover finance for a living, of what the USA's debt ceiling is. Many folks, including South Africans, are against raising the debt ceiling as a way to counter the continual increases in US spending. They are wrong, of course.
 
America's high rate of spending is not permissible because of the current level of the debt ceiling. Contrary to popular belief, the debt ceiling being raised is to pay for things the US government has ALREADY bought. As the New York Times succinctly explains: "Federal law requires Congress [the US' legislative arm] to authorise the government to borrow any money that is needed to pay for the programs that Congress has passed."
 
Blaming US spending on raising the debt ceiling is totally misguided: America's spending problem, in a nutshell, is due to Congress continually authorising government spending; not because it raises the debt ceiling, which happens afterwards. The elected officials staffing the House of Representatives and the Senate authorised the spending of whatever money is galloping out of America's coffers at the moment. It is because of this authorisation that America is spending so much money; not because the debt ceiling has been raised. Again: the debt ceiling needs to be raised to pay for the things Congress has already told, or given permission for, the government to buy.

Stop spending

The only analogy that really simplifies this is paying off a credit card. Congress has continually swiped the government "credit card" with happy abandon - since 1930 it has run annual budget deficits 69 times (out of 83 years: 83% of the time!), and therefore been forced to borrow money to pay for it. Every single year except 1930, 1947-49, 1951, 1956-57, 1960, 1969 and 1998-2001.
 
So Congress authorised all of this spending, but only seems to have developed a problem with it when it comes time to pay. Therefore, hitting the debt ceiling will lead to default - a very unpretty and unprecedented scenario for Americans and, notably, the rest of us. If the US government really is concerned about spending, it should stop spending. As opposed to buying a whole lot of things and committing funds, knowing it doesn’t have the money, therefore needing to raise the debt ceiling in order to borrow some wonga so it can pay what it owes.
 
Budgetary shenanigans have been common since the recession in the late 2000s and particularly since the 2010 Midterm elections. This resulted in the first budget deficits in double-digit percentages since the Second World War: in 2009 the deficit was 10.1%, in 2010 it was 9%, in 2011 it was 8.7% and in 2012 it was estimated at 8.5%. (In a best-case scenario this downward trend continues with government estimations down to 3.4% by the end of President Obama’s second term – still a deficit).

Again: this spending, and budgetary overflow, was authorised by the members of Congress. According to White House figures since the sixties administrations under presidents including Richard Nixon, Gerald Ford, Jimmy Carter, Ronald Reagan, George HW Bush and George W Bush all ran deficits, and continued to just raise the debt ceiling willy-nilly. (Presidents Lyndon B Johnson and Bill Clinton also ran deficits, but had years with surpluses.) The ceiling has been raised 75 times since 1962.
 
What the current crop of House Republican deficit hawks are aiming to do is hold the debt ceiling hostage - ie, threaten to not pay for things their chamber already committed to buying.
 
For those of you urging fiscal responsibility by risking default: I would love to know whether you think gleefully swiping your credit card and never paying the bill is ideal, or would it be preferable to stop spending money you don’t have?

Hitting the debt ceiling could be catastrophic

The USA's problem is spending - and its spending should be tackled. Not its obligation to pay bills it has already racked up. Quite simply: hitting the debt ceiling (after one or two minor emergency delaying tactics employed by the Treasury) equals default, and having the world's largest economy default could be catastrophic. Don't forget the US dumped all of us into a recession not all that long ago primarily because one aspect of its financial system went awry.

The US needs to constrain spending, but hitting the debt ceiling is not the way to do it, unless you're keen on recession, significant devaluing of the dollar (the world's reserve currency), and a probable tumble in the markets. Plus life would become severely more expensive for Americans – also known as "the people who buy most of the stuff the world sells".
 
Controlled and intentional spending reduction through Congress - admittedly, easier said than done - runs none of these risks. 
 
Be very careful what you wish for.

- Simon Williamson is a freelance writer.

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