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Don’t Raise Debt Ceiling without Radical Reforms

Prof. Peter Morici - 5/2/2011

To raise the debt ceiling, moderate Democrats and Republicans in Congress may compel President Obama to significantly cut spending. Done right, that would be a good thing!

Americans don’t need higher taxes—they need a government that spends within the nation’s means. That begins with acknowledging the facts and acting on them.

In 2007, the last year before the financial crisis, the deficit was a manageable $161 billion. The Bush tax cuts were in place, and wars in Iraq and Afghanistan were at full tilt. President Obama should stop blaming those for the fiscal mess.

Over the next four years, Congress, with plenty of White House participation, permanently increased spending by $1.1 trillion and added another $350 billion in tax breaks.

Viola! The deficit jumped to $1.6 trillion.

Most new tax breaks are temporary and should be left to expire, but even if all taxes and fees are raised by a horrendous 50 percent, the deficit would still be $600 billion.

President Obama refuses to accept those facts. He wants Congress to raise, without conditions, the debt ceiling. If Congress relents, nothing significant will happen before the next election, a new Congress is seated, and bond rating agencies downgrade U.S. Treasurys in 2013. America’s Greek tragedy would begin.

With investors demanding higher rates on U.S. bonds, interest payments would swallow more federal revenues and less money would remain for programmatic spending—either Congress spends less now or the bond market will cut its allowance.

If Congress raises the debt ceiling without credible and substantial spending cuts, interest rates on federal debt will rise the balance of this year and next. Then President Obama’s reelection, especially if accompanied by a Democratic majority in the Senate, could easily cause a buyers strike among investors for U.S. Treasurys. That’s what happened when Greece and Portugal failed to demonstrate the political will to curb spending and borrowing.

Social Security, Medicaid and Medicare now consume 70 percent of tax receipts.
The retirement age should be raised to 70 for all Americans under 55, and the federal government must better control health care costs.

Simply, the U.S. private health care system is monopolized, and is less efficient than other private systems abroad. For example, the United States spends about $8000 per person for health care, while Germany and Holland spend half as much and insure nearly all citizens by better controlling costs.

Neither the budget offered by House Republicans nor President Obama’s new health care law will adequately slow the pace of increasing costs. With the two sides so far apart and neither offering credible reforms, Standard & Poor’s has warned U.S. government debt faces a downgrade in 2013.

It would be better to have it out now by not raising the debt ceiling until a deal is struck.

This does not have to result in default on U.S. bonds. Without a debt ceiling increase, the Treasury still collects taxes and has choices—it will have enough money to finance about 60 percent of current spending.

If it chooses, the Treasury could pay the interest on existing debt, roll over bonds that come due without increasing the total debt outstanding, and still issue Social Security checks. Few in Congress would object and federal judges generally afford the Executive wide discretion in national emergencies.

Nothing short of a crisis will result in a grand bargain that raises the Social Security retirement age, and breaks the grip that drug companies, health insurance executives and malpractice lawyers have on the Congress and President to block real reform.

It sounds revolutionary, but just 16 percent of Americans favor raising the debt ceiling. Now Senate Budget Committee Chairman Kent Conrad and other moderate Democrats are balking at raising the ceiling without big spending cuts.

Cutting spending is not enough—radical changes to Social Security, Medicare and Medicaid are needed. With even modest progress so difficult in Washington, this crisis should not be wasted on anything less than radical reform.