Don't Believe The Debt Ceiling Hype: The Federal Government Can Survive Without An Increase

Jeffrey Dorfman Contributor, Forbes Magazine

10/03/2013

Ignore what you hear and read in the news. The federal government actually reached the legal debt ceiling about four months ago. Since then, the government has been financing its monthly budget deficit by stealing/borrowing money from other government funds, like the federal government employees’ pension fund. In about two weeks, the government will run out of tricks to keep operating as if nothing has happened. If the debt ceiling is not raised by then, the government has to balance its budget.

[While borrowing from federal trust funds may be a trick, it is not stealing. (See)]

That’s right. As much as the politicians and news media have tried to convince you that the world will end without a debt ceiling increase, it is simply not true. The federal debt ceiling sets a legal limit for how much money the federal government can borrow. In other words, it places an upper limit on the national debt. It is like the credit limit on the government’s gold card.

Reaching the debt ceiling does not mean that the government will default on the outstanding government debt. In fact, the U.S. Constitution forbids defaulting on the debt (14th Amendment, Section 4), so the government is not allowed to default even if it wanted to.

In reality, if the debt ceiling is not raised in the next two weeks, the government will actually have to prioritize its expenses and keep its monthly, weekly, and daily spending under the revenue the government collects. In simple terms, the government would have to spend an amount less than or equal to what it earns. Just like ordinary Americans have to do in their everyday lives.

[Actually, ordinary Americans usually borrow in an emergency when they have to spend more than they earn in their everyday lives, and they don’t stop trying to earn the money they need to pay for what they want simply because they can borrow.]

Once the reality of what hitting the debt ceiling means is understood, the important question is: can the government actually live with a balanced budget? How much money could it spend? Could enough spending be cut to live within a balanced budget? The answer is yes, the federal government could live with a balanced budget. Below I will show you precisely how.

[The real question is: Do the American people want to live within a budget dictated by an arbitrary debt ceiling as opposed to one that is determined by a majority vote of their elected representatives? I suspect the answer to these questions is yes only if the budget is decided by a majority vote.]

The federal government estimates it will collect almost $3 trillion in revenue for the fiscal year that runs from October 1, 2013 until September 30, 2014. Below I demonstrate one possible way the federal government could institute some priorities and spend only the amount it receives in revenue. (All the numbers I use to construct the balanced budget below can be found here.)

[In making this $3.0 trillion estimate of federal receipts in fiscal year 2014 the OMB assumed that total federal outlays would grow from $3.7 trillion in 2013 to $3.8 trillion in 2014. It did not factor in what would happen to federal receipts if, instead, federal outlays were cut by $0.7 trillion to $3.0 trillion in 2014—an amount greater than our entire defense budget. Such a dramatic cut in federal spending would most certainly cause the economy to tank, and federal receipts would most certainly fall substantially below the $2.7 trillion estimated for 2013 in this situation and far below the $3.0 trillion figure being used here. (SeePDFp.80 or XLS)]

To begin with, the interest on the national debt must be paid. I will budget $240 billion for that. The White House is guessing a little lower, but interest rates have been rising, so I will play it safe. Next, social security payments should run about $860 billion. Place that as the second priority and we already have spent $1.1 trillion of the $3 trillion we have.

Holding Medicare spending to about its fiscal year 2013 total and making some small cuts to Medicaid and other health spending would keep health care spending by the government to $860 billion. This does not include additional spending for the Affordable Care Act, but we need to prioritize and I am making it a lower priority than the health spending we have already been incurring. Also, there is no need for extra spending for the Affordable Care Act before January 1 since the coverage does not start until then. So as long as the debt ceiling is raised before then, there is no problem.

Veteran’s benefits will cost another $140 billion if we leave it unchanged. Department of Justice programs and general government functions add another $83 billion if their spending levels are held roughly constant. We can save some money by cutting science funding to $10 billion [a 66% cut] and international affairs spending to $13 billion [a 77% cut] which is enough to operate the State Department and embassies, but not pay foreign aid. This takes total spending to $2.2 trillion.

Cutting spending on conservation programs in half and paying only for agricultural research programs (no more farm subsidies) would cost $25 billion. Some moderate cuts to transportation spending bring it to $90 billion. Slicing education spending in half would reduce it to about $40 billion. The total for annual spending is now $2.36 trillion.

Retirement programs for federal employees add $137 billion to our spending. Cutting welfare programs back to basically food security programs (food stamps, WIC, the school lunch program) and housing assistance programs will leave federal welfare spending at $150 billion. Total spending has risen to $2.65 trillion.

[We are talking about a 55% cut in welfare spending here. No more refundable earned income or child tax credits; children’s health insurance; foster care adoption assistance; SSI for the indigent disabled or elderly; or substance abuse or mental health services. (See and also DFp.80, 258 or XLS, XLS)]

That leaves only about $300 billion for defense spending. However, employee contributions to the retirement plan and some miscellaneous offsets that the government does not count as part of the $3 trillion in revenue expected next fiscal year bring in $90 billion per year. That means we can spend about $400 billion on defense and still have a balanced budget. This would reduce military spending back to 2003 levels, before we were fighting wars in the Middle East. Not a small cut, but probably feasible.

[This is a 40% cut in defense. It should also be remembered that this assumes a 20% cut in total federal outlays will not cause a recession that would increase the deficit at the lower level of spending—think Greece, Spain, Portugal, Ireland, Britain, etc. all of which have followed this path. (See and also)

A 40% cut in defense is definitely not small and is most definitely not feasible. For one thing, this is a real 40% cut in defense, not just a monetary cut, and there is no consideration of the effects of inflation in saying that “this would reduce our [defense] spending back to 2003 levels.” After adjusting for inflation we find that a 40% cut in real defense expenditures would take us back to the level that existed in 1980! (SeePDFp.149 or XLS)]

Most people will probably complain about one or more of the cuts proposed here. That is to be expected. If you didn’t notice, NASA and the Departments of Commerce and Energy were completely eliminated. Deep cuts were made to some other departments (Education [50%], EPA [50%], Agriculture [90%], and HUD [?]). Welfare spending was reduced [55%]. However, the point was not to propose a budget that people loved, but to show that a balanced budget was not completely beyond reason.

[It seems to me that these kinds of draconian cuts are beyond reason. And we are not talking about eliminating just NASA and the Department of Commerce here. There is no funding for the Food and Drug Administration, National Institute of Health, Center for Communicable Diseases, Occupational Health and Safety Administration, Department of Energy, or disaster relief and community and regional development, not to mention the fact that the wealthiest country on Earth would no longer be offering any humanitarian aid of any kind to the rest of the world. (See and PDFp.80 or XLS)]

After all, the above spending paid all interest on the debt, left social security, veterans benefits, justice and law enforcement agencies, federal employee pensions, food stamps, and general government functions untouched, continued Medicare and Medicaid with some small cuts, and still spent non-trivial sums of money on education, transportation, and defense programs.

[But federal support for education and science were cut by 50%, defense by 40%, welfare by 55%, while the FDA, NIH, CCD, OHSA, DOE, NASA, and disaster relief and regional and community development were eliminated. These are non-trivial cuts.]

In the long run, if people want to restore some of the spending that I hypothetically cut above, we need to reform entitlements because that is where about three-quarters of the spending goes; principally to social security, Medicare, and Medicaid.

[You don’t just change your mind and restore some of the spending in the long run after you have disrupted the lives of millions of people and dismantled government programs and agencies.

And, strange as it may seem, there is an alternative. Decimating Social Security, Medicare, and Medicaid or decimating the rest of the government is a false choice. We also have the option of raising the taxes needed to fund the government.

We devoted 12% of our GDP to all of our social insurance programs in 2007—Social Security, Medicare, Medicaid, unemployment compensation, welfare, and all the rest—and in the midst of the ongoing economic depression we are devoting 15% today. The OMB estimates that through the normal course of economic growth the deficit will decline on its own to 10% of the budget by 2018. This means that a tax increase equal to 2.3% of our personal income would be sufficient to completely eliminate the deficit by 2018, provided, of course, that this tax increase did not diminish economic growth. This does not seem to be an unreasonable price to pay in order to avoid the kind of government advocated above. (See and also)]

The point above, however, was not to build a perfect budget or one that is sustainable in the long run, but just to show we could get by for a period of time without raising the debt ceiling.

[In the meantime we would devastate the lives of hundreds of thousands of dedicated public servants as we destroy the morale of those we depend on to keep our government functioning, not to mention the effect on the lives of millions of individuals who rely on the government services that would be cut or eliminated.]

Having established that the government could continue to operate without an increase in the debt ceiling, let’s also make clear the opposite position. President Obama has repeatedly claimed in the past few weeks that raising the debt ceiling does not increase the national debt. He says it is just a necessary step so the government can pay the bills Congress has already voted to incur. This is not true.

An increase in the debt ceiling allows the government to continue to run a budget deficit, which by simple accounting means that the national debt will increase. Not raising the debt ceiling does not mean defaulting on the current debt, but rather that no new debt can be incurred.

[This is a debatable point. (See)]

Raising the debt ceiling is like having the credit limit increased on your credit card. Technically, having a higher credit limit does not force you to spend beyond your means and end up with a higher balance on the credit card. However, it makes it much more likely, especially you are not good at handling money responsibly.

I think we can all agree that our national politicians are not financially responsible. Giving them a credit card with a higher limit is sure to end with them using that extra credit and hitting the new limit. Thus, conservatives in Congress should only agree to raise the debt ceiling in exchange for real and immediate spending cuts (not future hypothetical ones) and other changes that justify burdening the country with additional debt.

[It is certainly true that those who are unwilling to raise the taxes needed to finance the government a majority of our elected representatives have passed into law are financially irresponsible.

At the same time, it is also true that the liberals in Congress should adamantly refuse to give in to the kind of blatant blackmail being practiced by a minority faction in the Congress in holding the federal government, the American economy, and the economic stability of the world hostage as a bargaining chip in trying to get their way.

A government in which a minority is able to force its will on the majority through extortion cannot function to promote the common Welfare.]

Over the past five years government spending and deficits have soared while average American families have seen their incomes fall. Regular families have been forced to prioritize bills, cut spending, and do without in order to balance their budgets. Perhaps government needs a lesson in how budgeting works in the real world.

[Cutting government spending in the midst of an economic depression does not balance the budget. It causes output and government revenues to fall and unemployment to increase. This lesson should have been learned from our experience in 1929-1933 as inadequate government spending allowed the unemployment rate to soar to 25% and the ratio of federal debt to GDP to triple. It also should have been learned again from the experience in Europe since 2010: rising unemployment and government debt to GDP ratios as a result of futile attempts to reduce recession-created deficits by cutting government spending. That’s how cutting-federal-spending-in-the-midst-of-an-economic-depression budgeting works in the real world! (See and also)]

In fact, the liberals might be so concerned about settling this issue because they do not want Americans to realize that we can survive just fine with a lot less government spending. The sequester budget cuts turned out to be a non-event, not the disaster that was promised. The country did not even notice the missing spending that was cut. The debt ceiling deadline is a bigger deal than the sequester, but it is still manageable.

[Then again, it may be that liberals just don’t want to see the country endure the consequences of the draconian cuts outlined above or live with the kind of government that would result from these kinds of cuts.

And the ability of some to turn a blind eye to those who were directly affected by the sequester is hardly a justification for ignoring the kind of arbitrary infliction of harm on innocent people the sequester entailed.

Aside from those who were harmed directly by the lack of government services the sequester necessitated, according to the Congressional Budget Office: “In total, . . . canceling the automatic spending reductions effective August 1. . . would increase the level of real (inflation-adjusted) gross domestic product (GDP) by 0.7 percent and increase the level of employment by 0.9 million in the third quarter of calendar year 2014.”

The 900,000 individuals who are unable to find work because of the sequester most certainly do notice the missing spending that was cut even if they are unaware of the fact that the sequester is the reason they are unemployed.

Forcing an arbitrary $700 billion budget cut on the American people is, indeed, a much bigger deal. The United States stands at the very center of the world’s financial and economic systems. As we saw in 2008, when we sneeze, the rest of the world catches a cold. Once we hit the debt ceiling the lives of millions of people are going to be affected. At that point, only time will tell if this arbitrary cut is, in fact, manageable.]

If the fiscal conservatives in Congress need to threaten to cut up the government’s credit card in order to get the big spenders to realize it is time to get serious about bringing the budget toward balance, then so be it. Republicans should hold firm and get meaningful spending cuts and perhaps other legislative concessions in exchange for letting the national debt continue to grow.

If Republicans cannot get a worthwhile agreement, put the credit card in the freezer and let everyone learn a lesson for a little while. If Congress does not raise the debt ceiling, the country will not default on its debt. Social security checks will still go out on time. There will be spending cuts, but plenty of spending will continue. The country can survive for a while on a balanced budget. Perhaps we will be better off in the long run if government gets a little taste of what so many families have been experiencing for years: staying within a budget.

[If conservatives in Congress continue to hold the government, national economy, and world economy hostage and refuse to pass a continuing resolution in the absence of an agreement on a comprehensive budget, liberals in Congress and the President have no choice but to refuse to accept the partial appropriations bills offered by the conservatives until a continuing resolution is passed.

If they do not stand firm on this issue it will pave the way for a minority in Congress to block any program they do not approve and to fund only those programs which they do approve. The end result will be the government outlined above with the disruption of the lives of hundreds of thousands of public servants, millions of private citizens, and a potential for economic catastrophe that threatens the future of our country and the economic stability of the entire world. We will not have a government that is determined by the majority of our elected representatives if this comes to pass, and our government will not be able to function to “promote the general Welfare” as is called for in the Constitution. Nor will it be able to “insure domestic Tranquility.”

This is where we stand today, and it is where we will continue to stand until the American people break the stalemate by throwing either the conservative bums or the liberal bums out of office. Until then our country will remain ungovernable.

In the end, we as a people are going to have to decide whether we want the kind of government outlined above or are willing to raise the taxes necessary to keep the government we have. Until this decision is made by an overwhelming majority of our people, we will continue our journey down the path to anarchy we have followed for the past forty years as we prove to the rest of the world that American institutions do not provide a framework in which the American people are able to govern themselves. It seems quite clear, at least to me, that if we don’t get off this path soon our journey is not going to end well.]

Real-World Economics

Don't Believe The Debt Ceiling Hype: The Federal Government Can Survive Without An Increase

Real-World
Economics