Understanding the Debt Ceiling Debate

So what is the Debt Ceiling? It is a limit, self-imposed by the Congress, to the total debt that the federal government allows itself to borrow. This could be considered analogous to the credit card limit that one might have as an individual; or to the line-of-credit that a business might have negotiated with its bank. If the individual or the business has a good record of paying back its debt, the credit card company or the bank would likely raise those limits if requested. If not, one could try to find another lender who would extend some additional credit but this would probably be at a higher rate of interest. 

As the individual or the business borrows more against its debt limit, the monthly payments on the debt increase. If one gets to the point where it is necessary to borrow in order to make the payments on existing debt a crisis is imminent. If one fails to make payments on his debt obligations, others are not going to extend more credit.

The U.S. government is in a unique position. It can raise its own debt limit, the so-called debt ceiling, and has done so many times. So what’s the big deal? One major problem is that China has become the major source of borrowed money for the Unites States and could cut off their loans to us if we were doing something with which they disagree. China has already begun offering opinion on U. S. policy. Another major problem is that we must make payments on this debt and we have to raise the money somehow, with taxes or an improvement in our economy which would bring in more taxes without raising tax rates.

There are a couple of more terms that we need to define. We hear the terms Deficit and Debt. The Deficit is the amount that the government spends in excess of the amount of money coming into its coffers in any given year. The Debt is the total accumulated deficits of all previous years less any amounts we have paid on the principal.  When we have a Balanced Budget that means we have a zero deficit for that year. If the government takes in more in revenue than we spend in a given year this is referred to as a Surplus.

One would hope that when we run a surplus that the excess would be used to reduce the debt but most often Congress finds some ‘good’ cause and spends the money quickly. Often this spending becomes a continuing obligation, as in an entitlement, and unfortunately the money which was available to support the spending in the initial year is not available in future years and causes the government to borrow more to meet the increased spending in those future years or feel the need to raise taxes to pay for the new spending.

As a nation we must meet our obligations. This is almost universally accepted. Some advocate raising taxes as part of the solution. Many on both sides of the aisle recognize that we must raise the debt limit and we must find ways to cut spending. We have an immediate problem which needs to be resolved but we also have a long range problem.

Is the long range solution to raise taxes on the rich or for that matter on everyone? In the past when we have lowered taxes the economy flourished and tax revenues to the government increased as a result.  The best examples of this occurred during the Presidencies of John F. Kennedy and Ronald Reagan. When we have raised taxes the economy tanked and revenues sagged as during the Presidency of Jimmy Carter. Taxes have many times been used to control or limit some activity such as smoking or the use of alcohol. As a nation we encourage individuals to own a home by giving tax advantages to those who borrow to buy a home. We believe that home ownership is a good thing for our nation. So taxes can be used to encourage or discourage certain activities. Raising taxes on businesses generally has a chilling effect, often resulting in a freeze on hiring or a loss of jobs. 

Raising the debt ceiling would allow us to pay our bills immediately but in the past it has only had an enabling effect on those in Congress who want to spend more and every long term Congressman knows that the best way to get re-elected is to bring home the bacon.

This debate about the debt ceiling is a good thing. Yes, it is painful and no one likes pain. But it has forced us as a nation to focus on the root causes of our economic woes and that is a very good thing.

If a few weeks ago, Congress had agreed to raise the debt ceiling and the public had not gotten involved in the debate, it would have been business as usual. History would have repeated itself, spending would have continued almost unnoticed, the debt would have continued to rise and China would own more of the U.S. debt. It would have been a seamless continuation of the past. And the crisis would have been averted or so most people might have thought.

So how do we solve the problem? The issue is not taxes nor is it the debt.  Both of these are driven by spending. Raising the debt ceiling and/or raising taxes are treating the symptoms and will not cure the problem. Control of spending alleviates the need to borrow more or urge to raise taxes. Controlling spending is at the core of the problem.

Taxes should not be a part of the solution. The solution should be largely based on spending cuts with a sufficient increase in the debt limit to get us past this immediate crisis. Then we need to continue to control spending so there is no need to increase the debt ceiling in the future.