Published July 27, 2011
This is not your grandmother’s debt-ceiling debate. While the lid on government borrowings has been raised dozens of times since 1917, when it was first put in place in order to sell war bonds, the current scuffle is different for several reasons. First, the country’s fiscal prospects have never been darker, mainly because Medicare and Social Security payments will rise to unsustainable levels unless the programs are changed. Second, an increasing amount of U.S. debt is being sold overseas, making us vulnerable in ways not yet entirely clear. Third, we have a political force in the country – the Tea Party - that is committed to restraining government spending. For these reasons, the debate is more raucous and more threatening than ever before.
Normally, raising the lid on the country’s borrowings has been accomplished with little fanfare, though some have used the measure as an opportunity to sound fiscal alarm bells, and to score political points. (Ironically, then-Senator Obama weighed in during the 2006 debate with the following remarks: “The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure…It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies… This rising debt is a hidden domestic enemy, robbing our cities and States of critical investments in infrastructure like bridges, ports, and levees; robbing our families and our children of critical investments in education and health care reform; robbing our seniors of the retirement and health security they have counted on.”)
He was right then, and his comments resound today. The country cannot continue to spend at today’s level – at about 25% of GDP, a level last seen during World War II – without crippling our future. Why not? Because outlays at that level cannot be funded by traditional means – taxes and other fees – without undermining the productivity of the nation. Therefore, such a level of spending demands increased borrowings, which in turn leads to a dangerous and suffocating debt level. The rise in obligations means that in several years we will be spending more on interest costs than on Medicare or on defense. That projection was included in the President’s budget, which forecasts that interest rates rise only modestly – almost surely an overly optimistic assumption. This dire outlook has led the ratings agencies – Moody’s and Standard & Poor’s – to threatened a downgrade of our debt, an unprecedented warning.
As we have increased our borrowings, we have turned to foreign lenders. In 2010, 47% of our debt was held by foreigners, up from 19% in 1990 and 5% in 1970. As of the end of May, China held $1.1 trillion in U.S. bonds and notes. Not only does this obligation threaten our balance of power with Beijing, it also makes us vulnerable to a “buyers’ strike.” If, for political reasons, China steps out of the market for any period of time, interest rates would surely rise.
This unprecedented financial insecurity accounts for Republicans’ “intransigence”, as President Obama has described it. GOP legislators are sticking to their guns – demanding serious spending cuts, all the while risking the fury of President Obama and, conceivably, of voters back home. They know the stakes have risen, and they don’t trust Democrats to meaningfully alter the dangerous fiscal path the country is currently traveling. They are quite right to be skeptical. In 1990 President George H.W. Bush caved into raising the debt ceiling with the understanding that Democrats in Congress would cut spending by $2 for every $1 hike in taxes. Bush raised taxes by $137 billion; instead of slicing baseline spending by the agreed $274 billion, outlays actually increased $22 billion from the level estimated by the CBO before the deal was cut.
An urgent appeal went out today from TeaParty365, an outfit based in New York. They oppose House Speaker Boehner’s latest proposal to seal a deal, preferring instead the “cut, cap and balance” bill that earlier passed the House. They criticize the latest Boehner plan because it would allow our debt to expand, and relies on a “special committee” to come up with new spending cuts. They remind supporters that there have been “seventeen special committees since 1982 (that) have left us in the hole we’re in today…”
Most Americans are sick to death of Beltway bickering, and would like this debt ceiling crisis solved. Many have been convinced by President Obama that his is the voice of reason – that a “balanced” approach seems fair. However, the president is misleading the American public. His is not a balanced approach; so far, the president has not committed to any specific spending reductions nor any modifications of the long-term entitlements programs that threaten to ruin our country. Serious fiscal reform, which will invariably trim government largess for some, would not be good for his reelection campaign. It is, however, vital to the country’s future.