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The Debt Limit Debate Has Just Begun

By Gary Wolfram, William Simon Professor of Economics and Public Policy, Hillsdale College.  Article originally posted on Ricochet.com and hillsdale.edu.


The deal which raised the debt ceiling did not meet with the stock market rally that some had expected.  This was in large part because, despite the media hype, the markets knew that the U.S. was not going to default on its debt obligations.  The fact that 10 year Treasuries were yielding around two and a half percent indicates that the markets were aware that the U.S. always had enough revenue to make interest payments on our bonds and to refinance maturing debt.   

Without further borrowing ability the Treasury would not have been able to make all payments due, however.  A choice would have had to be made as to whether Social Security payments would be delayed, Medicare providers’ checks would be reduced, or government vendors would not get paid on time.  But given the 14th amendment’s provision that the validity of the debt of the United States shall not be questioned, it is almost certain that U.S. Treasury bondholders would have been paid. 

Who would not have been paid would have been a political choice.  AARP reported that its members “flooded the White House and the halls of Congress with 557,249 letters and 387,018 phone calls.”  This might give an indication that the politically correct thing for the President to do would have been to reduce and delay Social Security payments that are received by 60 million Americans, and blame it on the “Tea Party Republicans.”  While the President would appear on prime time national television to make his point, the Speaker of the House would have had a hard time beating out The Voice to give his response.

In 1995-96 I took a leave from Hillsdale College to be Congressman Nick Smith’s chief of staff.  A similar battle was taking place with the newly elected House Republican majority and President Bill Clinton.  The Republicans had control of the Senate as well and sent a balanced budget and debt ceiling increase to President Clinton, who vetoed it.  The federal government was temporarily shut down and President Clinton was able to win the issue politically.  Newt Gingrich ended up losing his position as Speaker of the House and Senate Majority Leader Bob Dole was firmly trounced by Clinton in the 1996 election.

Given the political realities, including that the Republicans only control one House this time, the outcome of the debt limit legislation was as good a deal as was going to be made.  The gain, however, was not in the details of the deal itself, other than it avoided raising taxes, but in pushing to the front pages of America the fact that federal government spending is not sustainable.

Friedrich Hayek wrote in The Constitution of Liberty that a primary benefit of democracy is that debate over the issues will advance the state of knowledge.  The “intransigence of the Tea Party Republicans” accomplished what it needed to—push the debate on federal government spending into the national spotlight.

The debt ceiling legislation does little to address the unsustainable degree of federal government spending, particularly in entitlement programs.  The media has trumpeted the “cuts” by adding them up over ten years.  For example, we know that the basics of the deal are about $1 trillion in cuts from discretionary spending, and then the Super Committee will find another $1.2 trillion in deficit reductions.  To put this in perspective, the Congressional Budget Office projects federal spending over the next decade to exceed $50 trillion. Little wonder that the markets did not rally in the face of the deal.

What this all means, however, is that the debate over federal spending has at least begun.  Most Americans now realize that the national debt is in excess of $14.3 trillion, and that Medicare and Social Security, as well as Medicaid, are in an unsustainable position.  What is vital is that those who believe in a limited federal government and in the importance of freedom keep the debate alive by noting that nothing has been done yet to address the long run unfunded liabilities of Social Security and Medicare. 

It is not sustainable for Americans over the age of 62 to expect their retirement and health care to be paid for by someone else for the final 20 to 30 years of their life.  Common sense tells us that this cannot possibly happen.  The debt limit debate has forced our Congressmen to admit to this.  The next step is to address the problem.

 

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