The Big Picture

http://www.futureofcapitalism.com/2011/07/the-big-picture

The situation in Washington is fluid heading into the weekend, but here are a few points that should stand:

1. The House Republicans opposed to increasing the debt ceiling are widely depicted as a bunch of nihilistic bitter-enders. It's worth paying some attention to what they actually say. Here's one Republican presidential candidate, Congresswoman Michele Bachmann:

Bachmann said the president had seven months' notice that America's debt was close to reaching its limit, but did nothing...

Bachmann criticized the notion that the country had only racked up – as Obama alluded to Monday – "a little credit card debt" and could continue to pay its debts with more borrowed credit.

"Well, $14.3 trillion – which is where we sit today – is not 'a little credit card debt.' Adding $2.7 trillion to get the president through the next election for a grand total of $17 trillion in debt is not … 'a little credit card debt,'" she stated.

Bachmann noted that nearly six years ago, the nation's debt was $8.67 trillion. If the president is allowed to raise the debt ceiling, she calculated, it would nearly double that amount.

"It took us 219 years to get to the first … $7 trillion in debt and only five years to almost double that amount," she summed.

Here's another Republican presidential candidate, Congressman Ron Paul:

The national debt now stands at just over $14 trillion, while net total liabilities are estimated at over $200 trillion. The government is insolvent, as there is no way that this massive sum of liabilities can ever be paid off....

Unless major changes are made today, the U.S. will default on its debt sooner or later, and it is certainly preferable that it be sooner rather than later....

The alternative to defaulting now is to keep increasing the debt ceiling, keep spending like a drunken sailor, and hope that the default comes after we die. A future default won't take the form of a missed payment, but rather will come through hyperinflation. The already incestuous relationship between the Federal Reserve and the Treasury will grow even closer as the Fed begins to purchase debt directly from the Treasury and monetizes debt on a scale that makes QE2 look like a drop in the bucket. Imagine the societal breakdown of Weimar Germany, but in a country five times as large. That is what we face if we do not come to terms with our debt problem immediately.

Default will be painful, but it is all but inevitable for a country as heavily indebted as the U.S. Just as pumping money into the system to combat a recession only ensures an unsustainable economic boom and a future recession worse than the first, so too does continuously raising the debt ceiling only forestall the day of reckoning and ensure that, when it comes, it will be cataclysmic.

2. The claimed deficit reductions in the Boehner bill are small relative to the overall deficit and relative to overall federal outlays. The no. 2 House Republican, Eric Cantor, tweeted, "Serious Spending Cuts Up Front: Boehner Bill cuts $22 billion in 2012 and $42 billion in 2013." That's a joke. Federal outlays are running an estimated $3.8 trillion a year. A $22 billion cut is about six tenths of a percent of federal spending, and a $42 billion cut is about one percent. The federal government would still be spending nearly a trillion a year more than it takes in in revenues, which is why the latest Boehner debt ceiling bill raises the debt ceiling to about $17 trillion from about $14 trillion.

3. Digging out of this hole would be a lot easier if we had better GDP growth than the 0.4% annualized for the first quarter of 2011 and 1.4% annualized for the second quarter of 2011 that the Commerce Department announced this morning. A stronger economy means people pay more in taxes, and it also means the government needs to spend less on welfare, unemployment, and other means-tested safety net benefits. Growth and the deficit/debt debate sometimes get treated as though they are unrelated, or, if they are related, it's some Paul Krugman type telling us if we only ran a larger deficit we could get growth going stronger. But this can be a theme not just for the left but for those on the political right — the answer to the debt and deficit problem isn't just austerity, it's growth.

4. The whole situation is similar to the TARP vote in many ways, not least in that we had a president and a Treasury secretary who have hyped it with scare language into a near-Armageddon-like situation, which has a way of becoming a self-fulfilling prophecy. If the president, whether it's Bush or Obama, says enough times that the market is going to tank if Congress doesn't pass X, the market has a way of taking that information aboard and reacting to it.

by Editor  |  Jul 29, 2011 at 1:42 pm Related Topics:  Government Spending, Paul Krugman, Politics, Taxes receive the latest by email: subscribe to the free futureofcapitalism.com mailing list