A Debt Ceiling = Balanced Budget
It's time to inject perspective into rather silly Debt Ceiling discussions, such as John Boehner's equivalent of: "Pay us $2 trillion Tuesday for your hamburgers today."
"The debt limit provides Congress with the strings to control the federal purse, allowing Congress to assert its constitutional prerogatives to control spending" [Anita Drishnakumar].
The current debt ceiling is a shade under $14.3 trillion. Current GDP is just over $14.7 trillion. $2 trillion will probably be the requested ceiling increase, to cover deficits through this year and into the next. In other words, our debt ceiling is about to blow by annual GDP, without considering that exceeding GDP is risking total system collapse. Since the debt ceiling has been raised 10 times since 2001, we can expect that GDP will only be visible in the rear-view mirror for a short time; if we fly past this important STOP sign.
An argument might be raised that debt in private hands is "only" $9.3 trillion and intra-governmental debt should not be considered. Those expecting Social Security benefits (~52%) and federal pensions (~17%) would beg to differ. While the interest on such debt is not distributed currently, the principal and interest will at some point be paid out. When paid, the refinanced amount will become debt in private hands [or more likely, the Fed].
While the current deficit is projected to be $1.6 trillion, maturing debt also needs to be rolled over, with the total approaching $4 trillion over the next 12 months. With China scaling back, Japan in financial trouble, and 23 of 27 countries in Europe with deficits in excess of 3% of GDP, where will this funding come from? The current PIIGS situation in Europe may provide the U.S. with temporary safe haven investing, but that won't last, if our debts continue to rise.
Could the federal government be forced to default on obligations, if the ceiling is not raised? What a transparent scare tactic. The federal government has a regular flow of funds from tax revenues that exceeds $2 trillion annually. Interest on debt is roughly 15% of that amount. There are many unused assets owned by government that could be sold or leased to meet other obligations.
While the conservative's Holy Grail is a "Balanced Budget" amendment to the Constitution; the chance of this happening is extremely remote, especially since it's doubtful that a majority of legislators will ever want it, since it would restrict their latitude. Also, the amendment process is so time consuming that such a solution can have no bearing on our current actions.
According to John Mauldin, in Endgame, the U.S. could hit the wall as early as 2013. Regardless of the actual timing, the probability of an "unsustainability" crash increases daily. Paul Ryan's "Path to Prosperity" will not kick in soon enough or deep enough. We must act now.
Possible Solution: The Debt Ceiling is the perfect vehicle to use, since it can become Thor's hammer on spending. A poll by Gallup last Friday indicates that 47% of the population opposes raising the Debt Ceiling.
However, there are three problems with maintaining the Debt Ceiling as a hard cap: No plan (other than the top down 10-25 Plan outlined in Fixing Everything) is currently available as a blueprint for getting anywhere close to a balanced budget in any reasonable timeframe. Second, while polls show a desire to cut spending, even those polled flip-flop on cutting specific programs. Third, a hard cap in nominal dollars is too stringent, since it neither recognizes the inflationary decay reducing dollar denominated debts nor "real" growth in the economy.
Any compromise should tie the Debt Ceiling to nominal GDP. This would remove the necessity of continually legislating new ceilings. It would allow immediate wiggle room ($400 billion) to implement serious cuts. Keynesian remedies for future recessions, which have not worked, will be pushed off the table; and while the resulting recession (in GDP terms, for what that's worth) will probably be sharp and severe, it will allow healing to begin. Foreign holders of our securities will be assured that while a deficit reduction plan is not yet in place, the Debt Ceiling will enforce fiscal discipline.
The sole (yet significant) exception to this soft cap should be a one-time recognition of unfunded current commitments: Social Security, Medicare, and Medicaid amounts in excess of future budget coverage. Recognizing this very real liability now will allow us to manage that liability and balance the budget in the future.
Concurrently, we must stop the bleeding caused by adding to future commitments. While this one-time recognition will add ~$10 trillion to recognized debt, as a third debt category called "contingent liabilities"; it will provide a path to migrate out of all entitlement commitments (currently over-estimated from $100-200 trillion) over the next 30 years. Cross-generational entitlement plans are too easy to pervert and will fail in a declining population growth environment. Meeting expectations of both current and near-term beneficiaries should provide enough political cover to implement true budgetary discipline.
Entitlement debt recognition must be paired with a solid commitment to keep growth in total debt below growth in nominal economic growth, using an auto-adjusting debt ceiling. Credit markets should react favorably, since quantification of future entitlement overhang should relieve concern about far larger potential liabilities.
Whether this entitlement clarification and ongoing fiscal restraint will sustain enough good will to finance projected reduced needs is still in doubt, but without such fiscal constraints, we are doomed. This Debt Ceiling debate offers a last opportunity to avoid a crash that is otherwise certain.
