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A recent NPR
story on the debt ceiling seeks to correct the American public's "misunderstanding"
of the issue. But as we'll see, whether through ignorance or deception, the
analyst on whom the story relies makes claims about
the debt ceiling that are simply not true. It turns out that the public's gut
reaction to politicians' piling on ever more red ink is right after all.
Denying the
Obvious
The opening hook of the story — which, remember, is seeking to
correct how poor American rubes think about these difficult issues —
left me speechless:
Despite all the hand-wringing over raising the federal debt limit, and
the prickly debate between Democrats and Republicans, there's some confusion
about what it actually means. A recent Pew Research Center poll found
that 48 percent of Americans believe raising the
limit would lead to more government spending and higher debt. It's a
figure that, according to many experts, reflects public misunderstanding.
"The deficit and the debt have become big issues, and it's largely a
proxy for concern with the economy," Andrew Fieldhouse,
federal-budget-policy analyst for the Economic Policy Institute, told The
Root. "People are under financial strain, so when they see a number
like [the debt limit of] $14.3 trillion, they expect the government to act as
frugally as they are. But it's a false comparison. We can't choose not to
raise it." (emphasis added)
I admit that the Pew Research Center poll annoyed me, but for the
opposite reason. Why didn't 100 percent of Americans think that a
higher debt ceiling would lead to a higher debt? How can anyone possibly deny
that? That's the whole point of raising the ceiling after all — you
want to increase the debt above the existing ceiling.
Now the other half of the claim, namely that raising the government-debt
ceiling would lead to more government spending, doesn't follow by
definition. For this claim, we just need to use a little common sense and
knowledge of how politicians have behaved throughout recorded history.
The so-called experts who deny the link between raising the debt ceiling
and increased government spending have in mind that Congress makes spending
decisions and then separately authorizes the Treasury to borrow money
to fund it. Even here, the 48 percent of Americans are right, and the NPR
story itself agrees with them (though the author doesn't realize it).
How do I know that? Because later in the story, it scares the reader with
the consequences of not raising the debt ceiling. The story lists nine
things that the reader needs to know about the issue. Here's number six:
6. Without a raise of the debt ceiling, certain things
just won't get paid.
"If the U.S. Treasury is out of borrowing authority, as bills come
to it, it cannot pay all of them," says Fieldhouse,
explaining that there's not enough revenue to repay creditors. Theoretically,
Medicare, Social Security, military paychecks, veterans' benefits,
unemployment benefits and tax refunds would all be interrupted. "The
federal government would cease to function the way it's supposed to in every
sense."
So there you have it. The NPR story opens by shaking its head that 48
percent of Americans think raising the debt ceiling would (a) lead to a
bigger debt and (b) lead to more government spending. We can all agree that
(a) is true by definition. And for (b), the NPR story itself agrees that
without raising the ceiling, "certain things just won't get paid."
So those 48 percent of Americans were on to something, notwithstanding the
"experts" who disagree.
Running Up a Bigger Debt to Keep Down Interest Rates?
Throughout the story — and this also suffuses the entire public
debate on the issue — the writer conflates two different things:
raising the debt ceiling and servicing existing debt. Treasury Secretary Geithner and others keep arguing as if failure to raise
the debt ceiling necessarily means the government will default on
outstanding Treasury interest payments, but that's simply not true. The
government can refuse to raise the debt ceiling while continuing to
service preexisting debt. Therefore, it's nonsense when the NPR article
warns that
2. Not raising the debt ceiling would make the national
debt worse.
If the government is unable to borrow and keep paying for its
obligations, then the federal debt, and any future borrowing, will accrue
higher interest rates. In other words, we would end up owing more money than
we would if the issue were confronted by raising the debt ceiling. "You
can't wish away the debt of the United States," says Fieldhouse.
"Much to
the chagrin of the so-called experts, a sizable portion of the American
public can smell a rat."
Debt service currently consumes about one-sixth of incoming revenues
(not spending). So if the government would simply cut spending elsewhere, it
would still have plenty of cash coming in the door with which to pay existing
bondholders. If the government actually put in place a serious plan to
balance the budget, while not jeopardizing interest payments, there is no
reason for interest rates to go up. In fact, it would be a signal that Uncle
Sam was more likely to pay off his debts, as he capped the total debt.
Only in the political realm could it have ever become a standard talking
point to claim that we need to go deeper into debt to reassure our creditors
that we will pay them back.
Do We Need to Raise Taxes?
The NPR story and its alleged expert go on to explain why cutting
spending is no solution to stop the red ink:
7. The GOP-proposed spending cuts alone wouldn't work.
Republicans want $2.4 trillion in budget cuts in exchange for raising the
debt ceiling. "You can't feasibly cut spending by enough to avoid a
debt-ceiling increase, and you can't balance a budget simply by cutting
spending," Fieldhouse says of the drastic
proposals being pushed, adding that the government will have to raise
revenue. But he says that raising the debt ceiling should not be contingent
on any long-term deficit plan, no matter the approach. "Congress
operates very slowly, and we're in a hyperpolarized period in our politics.
You cannot expect Congress to resolve long-term budget problems between now
and the beginning of August."
As I pointed out in a previous article,
if the government merely returned to its 2003 spending levels, then the
current revenue stream would be enough to pay for everything —
including interest on existing debt. I personally don't remember the country
falling apart in 2003 from lack of federal-government expenditures.
Admittedly, it would be tough for Congress to slash about $750 billion in
spending between now and the end of September (when the fiscal year ends),
which is what it would take to live within its means.
There is another option that could be used to buy time: sell off assets.
This is what any private-sector organization would do if it wanted to start
digging out of a massive debt problem. In this
article I rattled off more than $1 trillion in highly liquid assets that
the federal government currently owns and should return to the private sector
in any case. Doing so right now would allow the Congress more time to make
the necessary cuts in spending without raising taxes or the debt
ceiling.
Conclusion
Much to the chagrin of the so-called experts, a sizable portion of the
American public can smell a rat: they know that raising the debt ceiling is
not needed to avoid calamity, and they know it would just let the politicians
continue to waste our money.
Robert P. Murphy
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