I have become increasingly exasperated as I read about polls like this one where 63% of Americans oppose raising the debt limit. I was even more surprised to find that one of the guys that I work with was among this group. When I started talking to him about what the debt ceiling really means, he changed his mind, so I'm going to re-post a summary of what I told him, in the hope that some of those 63% read this and maybe change their mind too.
I think that when people say, "Don't raise the debt ceiling", what they really mean is, "Learn to live within your means. Don't spend more on services than what you collect in revenue." Fair enough, I agree with that too. But that's not what the debt ceiling means. The debt ceiling doesn't authorize any new spending, it allows us to pay for the spending bills that have already been approved.
In Fiscal Year 2011, Congress has already passed appropriation bills, committing the US to pay $3.834 [1] trillion dollars for things like:
- National Defense ($750 billion)
- Social Security ($736 billion )
- Income assistance ($595 billion) - this covers unemployment payments, housing payments, retirement and disability insurance for federal workers, and food stamps.
- Medicare ($497 billion)
- Medicaid and other health programs ($401 billion)
- Interest ($499 billion payed - $248 billion collected = $251 billion)
- Education and training ($126 billion)
- Veteran's benefits and hospitalization ($125 billion)
- Everything else ($354 billion). This includes energy, natural resources, transportation, justice department & FBI, NASA, commerce and housing credit, community and regional development, disaster relief, international affairs, foreign aid, agriculture, and general government operations. It also includes credits for rentals from offshore drilling and other miscellaneous items.
Whether or not you think these things are important, they've been approved by Congress. Now it is the U.S. Treasury's job to pay the salaries and bills for these agencies, creditors, retirees, soldiers, government employees, etc. The U.S. Treasury is projected to receive $2.567 [2] trillion in revenue for 2011. This is only about two thirds of what is needed to pay for the items that Congress has approved. It is impossible to solve this problem with spending cuts, because the money has already been spent! So one of two things happens: Either we borrow money to pay for these items, or we don't pay the bills. Borrowing money is bad: It gets us deeper into debt, leads to inflation, and might eventually affect our credit rating as a nation. Choosing not to pay the bills is worse: It is morally and ethically wrong to promise payment to somebody and then renege on that promise (whether that person is a war veteran, a sick child, a senior citizen, or a Chinese bank doesn't make it any more or less wrong). In addition, it will certainly and immediately affect our credit rating as a nation, which will get us into debt much deeper than if we borrowed to pay these bills.
There are some who say that the risks of hurting our credit rating are overblown, and that since we have enough revenue to cover the $499 billion of interest we owe annually, we'll take money from other areas and pay that first. I have two problems with that.
One: Which other areas? Remember, we've already received the goods and services based on our commitments to pay this money. Teachers have been hired, students have already been approved for college loans, buildings have been constructed, ammunition has been expended, soldiers have fought and died, or are recovering from wounds in veterans hospitals. Which of them will not receive what Congress has already promised them? Should our country honor its commitments or not?
Two: S&P and Moody's credit rating agencies have already confirmed that they are considering a downgrade on U.S. Treasuries [3]. Even if the U.S. does not default on Treasury bonds, refusing to pay for any goods or service provided to us by anybody damages our credit rating.
If our credit rating is lowered, then the cost of borrowing money rises. To give an example, Greece's ten-year government bonds were paying 5.3% in April of 2009. One year later in April 2010, S&P downgraded the credit rating on Greek debt to 'junk' status, and the interest rate spiked to 9.7%. Today it stands at 16.7%. [4] [5]
The U.S. overall rate for interest paid is currently 3.3% - one of the lowest in the world [6]. While it is highly unlikely that our credit rating would be downgraded to 'junk', S&P has warned that it is considering a cut from AAA to AA, putting us on par with Slovenia, Bermuda, and Chile [4] [7]. If this happens and our interest rates rise on debt we owe, we would have to pay more every year for the same amount of debt. Each 1% rise on our overall debt would equal $151 billion per year wasted [8] - not employing or helping anybody in America, not building roads or schools, just gone, with about 30% of it overseas to foreign creditors [9]. It would take a 13% increase in personal income tax revenues to equal the cost of the lost money for each 1% hike in the interest rate. [2]
Let's summarize. Most of us agree that the U.S. should live within its means - spend no more than revenue. Achieving that is going to require spending cuts, tax increases, or both, and that needs to happen in order to prevent us from being in the same situation next year of choosing between two evils (borrowing vs. defaulting). However, raising the debt ceiling now, to cover the bills we've already incurred, has nothing to do with next year's spending. It is the morally and ethically right thing to do, and it prevents us from getting deeper into debt than we already are.
Constructive criticism and civil debate is welcome in the comments section below.
===References===
Many of these spreadsheets come from the Government Printing Office web site
6 3.3% figure comes from dividing $499 billion in interest by total debt of $15,144 billion, which comes from Federal Debt at End of Year
7 S&P sovereign nation credit ratings8 $151 billion comes from 1% of our current national debt of $15,144 billion. This interest rate change would not take effect immediately on any existing debt, only as current treasuries mature and we take on new debt. All existing debt matures between 1 month and 30 years, with the average being 80 months
9 $4,489 billion is held by foreign countries, which is 29.6% of the total debut of $15,144 billion.
8 comments:
Great article Jesse. I am glad Lisa asked her FB friends to read it. I wish more people understood the importance of this.
Jessie, let me tell you as a person who has worked for or with the government for the last 36 years that you’re correct on most, but not all, of your facts. Not all of the money has been spent. So let me explain. There are three kinds of money the government deals with; R&D, O&M, and with the military, MilCon. R&D is research and development money that is what we call three year money. Once the money is put on contract, the government has three years to spend it. So if the government waited and put that money on contract in July of 2011, it has up to July of 2014 to spend it. So any money that is not spent yet could be pulled off the contract. O&M money is Operations and Maintenance dollars. This is one year money and has to be spent within one year of the beginning of the contract. Again some of this money may not even be on a contract yet. It could be sitting in an agency account waiting to be put on contract. The government could wait until September 30 and put it on contract and have up to September 30 of 2012 to spend it. Any unspent money can again be de-obligated from the contract and put back into the agencies’ account. MilCon is Military Construction money which is five year money. It pretty much follows the same rules. It has to be spent within five years, and any money not spent can be pulled. I think there are similar kinds of construction line of funds for non military projects. I will tell you that from my experience, around the first of August each agency starts looking for contracts with unspent money or money not on contract yet. The idea there is to de-obligate these funds and use it for other projects, as long as it falls within the CBJB rules. The CBJB is the Congressional Budget Justification Book. These are the “rules” that tell government employees how and what to spend the funding on. I believe that if the appropriations committee wanted to, and if Congress had the nerve, they could pass a law that would pull any unspent money back into the Treasury. Would it be enough to fill the gap of 33%? I don’t know but it could help reduce that deficit number a lot.
Thanks Jim, I'll do some reading and try to learn more about that. Putting together the research to write this article has been very interesting so far!
Thanks for the article...I like reading others POV from time to time.
Either way you have it there's no escaping debt. The US can't function with out it. It's a revolving cycle. If you have time take a look at the Zeitgeist movie series http://zeitgeistmovie.com/. There are three movies listed there. After the first one originally released in 2007 i'm sure you'll watch the other two. I'm sure you'll find this interesting.
See you at DevCon
Rather than not raising the debt ceiling, one answer to those who don't want more spending is, as Jim suggests, to pull any unspent money back into the Treasury.
On the other hand, the U.S. economy WILL recover one day, and tax revenues (even at today's very low tax rates) will increase with the improved economy, and we WILL one day be able to lower our debt. I think it is more important right now to INCREASE federal spending to get more cash into the marketplace, more people employed (with their subsequently increased spending), etc. then it is to manage our debt. We just need some legal triggers to again reduce the spending when the economy is back on its feet
Thanks for this well-written and informative article, Jesse. The problem is that compromise has become a dirty word to right-wing Republicans afraid of the Tea Party ideologues. Their goal is to paralyze government, even at the cost of hurting us all, so that Obama looks incompetent and they can wrest the presidency from him. When it is suggested that we raise the income tax on the wealthiest individuals, along with making deep budget cuts that, of course, hurt the most needy, they won't hear of it. Supposedly, so goes the cynical argument, the more money someone has, the more they will put back into the economy in the form of jobs. This hasn't worked yet, as the income tax rate for the wealthiest was already lowered quite a few years ago. Perhaps, some of these naysayers will ultimately be brave enough to do what their consciences tell them is right, despite threats from tea partiers. We can only hope - and find ways to bring as much pressure to bear as possible.
Jesse,
It would be nice if some significant cuts were put on the table and a compromise could be achieved. As you rightly point out, raising our borrowing costs will not help. But I the democrats need the republicans to be 'partially to blame' for the new taxes. And that seems to be really all that’s on the table. New taxes..
Howard -
It just never happens. As someone once said comparing congressional spending to drunken sailors is a slight on drunken sailors. When they run out. They stop.
MAYBE they need to raise the deficient some BUT some cuts need to happened right now. Not maybe over a decade. Which NEVER happens.
I don't think compromise is the issue with at least many of the media be damned Republicans. They just know that if they go along with the raise the debt ceiling, so lets do some more taxes and yeah we will get back to you when we cut something. The 63% who don't think much of raising the debt ceiling will vote them out.
Nobody likes compromise. But when you add, on party lines, lots of new spending, why should the republicans bail you out, when gasp the bill comes due?
And I don't believe any long term multi year cutting. That’s - let me get reelected and I can forget about that nonsense and get some of my pet pork funded.
Hey Maxine, never let the facts get in the way..
Finally had time to read your write up carefully. I now fully agree it would've been much better to quitely raise the debt limit. And since it's much easier to judge things in retrospect, and given the S&P justification, raising the debt limit soberly would've maybe shown to the rating agencies and the rest of the world that our systems are functioning. Unfortunately, our politicians are all in short term mode, as usual; and looks like they would rather look good on FOX News or MSNBC than pick the better of two bad choices for the near term. S&P itself is not without flaw, but I think that they rightly categorized our government as disfunctional.
I disagree with Jim regarding the possiblity of machinations with "spent" money. It's another excuse, it seems that the problem is much more deep rooted. I'm not even sure what the solution might be, I think that things will have to get worse before they get markedly better.
Maybe we need to start doing things we are not expected to do (as a nation).
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