The debt limit is really what filmmaker Alfred Hitchcock used to call a "MacGuffin" - a device used to propel the plot forward, even though it may be meaningless.
The debt limit or debt ceiling concept dates back to 1917. Prior to that date, Congress had to specifically approve any new borrowing done by the federal government. For convenience's sake, Congress then decided to periodically approve increases in its credit line so that the government could borrow without a vote as long as the total outstanding amount didn't bust through the cap. The current cap is $14.3 trillion. The debt limit includes both debt held by the public (that is, by outside investors, which comes in at around $9.7 trillion) and "intra-governmental holdings" or debt owed by one part of the government to the other, which comes in at around $4.6 trillion). The debt limit has been increased more than 100 times since it was instituted and 10 times in the past 10 years alone. Both political parties figured out they could spend more by simply voting to raise the limit.
So what happens if the government doesn't raise the debt ceiling?
The most recent Office of Management and Budget data shows federal revenues will reach $2.17 trillion this fiscal year. Interest payments on the nation's debt are estimated to be $205 billion this year, or about 10 percent of revenues. Taking that payment off the top leaves $1.9 trillion for Congress to spend. That's enough to pay for Social Security ($741 billion), Medicare ($488 billion), and Medicaid ($276 billion), with $395 billion left for other programs. The government could still borrow more over the 395 billion with votes by Congress.
- August 2 is an arbitrary date.
- Reaching the debt limit is not the same as defaulting on the federal debt. When tough financial times hit, families eat out less, go to fewer movies, buy fewer clothes and postpone vacations. They also sell stuff or take them to a pawn shop. If those things don't save enough, then they might borrow money to pay bills or skip payments. The federal government always pays bills with borrowed money. Congress has largely avoided those vital cost-cutting steps that families take. The government has a number of assets, ranging from cash on hand to gold reserves to TARP assets it could sell to cover all or part of its debt obligations through the end of the current fiscal year.
- Both sides are using the August 2 deadline to negotiate terms.
- This is no way to run a country. Improving the link between the spending and revenue decisions that increase the need to borrow and changes in the debt limit would improve the situation. Better alignment could be possible if decisions about the debt level occur in conjunction with spending and revenue decisions as opposed to the after-the-fact approach now used. This would help avoid the uncertainty and disruptions that occur during debates on the debt limit. It might also facilitate efforts to change the fiscal path by highlighting the implications of these spending and revenue decisions on debt. Rep Ann Marie Buerkle has a clock running on her website that shows how long it has been since the US Senate last passed a budget.
- This is no way to run a country, part 2. We're out of money because we've spent too much for too long. The feds have not reduced spending amid the lower revenues of the recession.
Ronald Reagan's budget director David Stockman, got this point exactly right. He said that in the best of all possible worlds, we'd have a government that did a lot less than it does now. Well sir, in my opinion, the results of the 2010 election indicate that a majority want a government that "did a lot less than it does now."
Our nation just had its 235th birthday on July 4th. I think the charts below reveal the best management of federal money took place between the time of the Civil War and reconstruction and WWI. A dramatic growth spurt of the debt occurred because of the Civil War. The debt was just $65 million in 1860, but passed $1 billion in 1863 and had reached $2.7 billion following the war. In the following 47 years America returned to the practice of running surpluses experiencing 36 surpluses and only 11 deficits. During this period 55% of the US national debt was paid off.
The first graph is the Federal debt as a percent of GDP from 1787 to 1999. The second set of graphs is both gross and federal debt and both as trillions of dollars and as a percent of GDP from 1940 to 2010.
Cross-posted at Unified Patriots