The Truth About the Debt-Ceiling Fight

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In any scientific endeavor, one must quantify a phenomenon in order to understand it.

The CBO projects revenues for 2011, 2012, and 2013 of $2.23 trillion, $2.56 trillion, and $3.09 trillion, respectively. A simple proration of these numbers to account for the last two months of this fiscal year, fiscal year 2012, and the first three months of fiscal year 2013 reveals total revenues of $3.70 trillion, or $2.61 trillion per year.

President Obama's fiscal year 2010 budget request, the Orwellian-titled A New Era of Responsibility: Renewing America's Promise, was $3.55T, which would amount to $5.03 trillion in spending over the next 17 months, the time period our politicians want to cover. The shortfall would thus be $1.33 trillion, not $1.5 trillion and not $2.4 trillion, if one considers Obama's 2010 spending request levels to be the baseline.

Are tea partiers being unreasonable with their demand that the debt ceiling not be raised? Are they ideologues who do not understand the nuances of federal budgeting and whose ideas of fiscal conservatism are outright dangerous?

We have been told that failing to raise the debt ceiling would precipitate a 40% cut in government spending. Since most of what the government does is illegitimate, that would not be unreasonable at all, actually, but even on the Tea Party critics' own terms, the numbers tell a different story. If the debt ceiling is not raised, it would represent a 16% decrease from Bush's 2009 budget request of $3.11 trillion, decried by both the right and the left as overspending.

It would represent a 26% cut in government spending from Obama's 2010 budget request, which was raised substantially from the previous year based on Keynesian notions of the prescription for a recessionary economy. The recession is over, but politicians on both sides of the aisle are still falling all over themselves to prove that they are unwilling to decrease spending from whatever levels they happen to find themselves at the moment.

To go back to Bush-level spending would require $0.70 trillion of borrowing until the end of 2012, around which time, revenues would begin exceeding government expenditures.

One clear implication of all this is that tax increases are not at all mathematically necessary to close the gap, even in the near term. In fact, the Obama administration does not pretend that tax increases are a practical matter; it has been fairly explicit that it considers raising taxes to be a moral matter. The so-called conservatives who support Obama in his bid for tax increases and who insist that raising taxes is both the necessary and responsible thing to do are ignorant, mouthy ideologues, at best.

Concerning the debt ceiling's role in causing a default, there are at least four falsehoods dumbing down and polluting the national conversation, and they are propagated irresponsibly by a left-wing media (including some left-center anchors at Fox News). These are the supposed inability of the government to make debt payments if the ceiling is not raised; the conflation of U.S. Treasury debt with securities issued by other government agencies; the notion that political events, not financial ones, trigger downgrades; and the notion that the threat of downgrade is coming from a failure to allocate for continued spending and debt payment.

As anyone who has been paying attention knows, ongoing federal revenues exceed interest payments on U.S. Treasuries by a very large margin ($180 billion vs. $44 billion a month on average). There is no chance of default.

The federal government can and will continue making all its payments on the debt whether it is authorized to spend past the current debt ceiling or not. The Obama administration is not telling the truth when it claims that the government will run out of money to make debt payments on August 2. It will cut spending elsewhere before it defaults.

If Obama refused to make the debt payments, he would be destroyed politically even if he continued to blame Republicans for events. The circumstances behind a U.S. default do not constitute the kind of secret that can remain hidden.

Securities issued by certain government agencies, such as Fannie and Freddie, have been implicitly conflated with U.S. Treasuries in the debate. If Congress does not raise the debt ceiling, some of these securities may get downgraded, which would increase borrowing costs for these agencies, but these securities are not U.S. Treasuries. There will not be an economic Armageddon if ratings agencies downgrade them. Only the ratings of U.S. Treasuries matter in terms of global systemic effects.

Contrary to propaganda, the ratings agencies have not threatened to downgrade U.S. Treasury debt if the debt ceiling is not raised. The big three rating agencies will not downgrade U.S. Treasury debt over a political event or non-event. They would get sued if they did.

U.S. Treasuries set the standard for virtually every other kind of security in the world, and the big three have a special status that is codified in law. They have to stick with financial event probabilities in their ratings, not the probability of seniors getting the Social Security checks they were "promised" or some cabinet agency getting funded.

The ratings agencies will downgrade for "actual" defaults (which include technical defaults). Various rating agencies have cautioned that the U.S. is or will be on a ratings watch. A ratings watch is not a downgrade. It is an observation policy.

The greater threat to the credit ratings of U.S. Treasuries is from runaway debt that destabilizes the country's ability to pay back these formal debt obligations, and the rating agencies have cautioned that downgrades are forthcoming if the national debt is not brought under control within a matter of months. This has led to the spectacle of a supposed national leader carping at a private financial organization over its professional judgment of the financial health of an entity it is charged with rating by its clients.

It is possible that the entire GOP is too dim to know all this, but given that the leadership has experts advising them, a more parsimonious explanation is that they have made a strategic decision not to challenge any of the misinformation for whatever reason. With Senate Republican leadership, that reason seems to be that they are in conscious, fundamental agreement with the Democrat worldview and thus would not benefit by the public understanding the truth. That is my theory, and it will be tested over the coming 15 months.

Wendy Milling is a contributor to RealClearMarkets
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