Sunday, September 8, 2013

The never ending battle over the debt ceiling

     It seems, that the battle over the debt ceiling, the maximum amount of money the United States government can borrow before defaulting, won't end. Despite the fact that a default would cause a catastrophic economic crisis, another round of congressional bickering has began.

     Since 1960, the debt ceiling has been raised 78 times. For most of that time, it was relatively uncontroversial, since congress knew the result of failing to do so. However, starting in 2010, the Obama administration and the Republicans have been arguing on what should be done. After much debate and economic uncertainty, the debt ceiling was raised at the last minute on August 11, 2013. Many agree that this uncertainty hurt economic growth. According to the Bureau of Economic Analysis, which is in the U.S. department of commerce, Real GDP fell from a healthy 3% in the 2nd quarter of 2011 to a sluggish 1.5% in the third quarter. Unfortunately, this economic slowdown in an already fragile economy  did not stop another argument from happpening. On February 4, 2013 congress temporarily suspended the debt ceiling. Currently, congress has until mid-October to raise the debt ceiling before the government hits the $16.7 trillion cap. Many Republicans want to use this as an opportunity to cut spending, since the president has not done so in the past except for the case of the infamous "sequester"which blindly cut 10% off almost all government programs except entitlements.  The concept of a sequester was proposed as a budget solution that was so distasteful that Congress would be forced to come to agreement to avoid it. Unfortunately, no agreement was struck and the sequester was enforced. Some of the far right Republicans say they will not raise the debt ceiling unless Obama's health care law is defunded. The president refuses to negotiate on the debt ceiling, and says he will treat the debt ceiling and budget problem as different issues. I believe there is a strong chance that by October 1st, this problem will still not have been solved. It is likely that the debt ceiling will be raised close to the deadline; however, there is still a possibility of a crisis. The fact that this congress is on track to be the least productive congress in modern history is not reassuring.

     At this point, it appears that neither will congress draft a meaningful bill addressing the deficit nor will the president  propose a budget that curbs spending without some sort of outside pressure. Even worse, all of this is happening in an economy with an unemployment rate of 7.4% and GDP growth of only 2.5%. This means that if too much money is taken out of the economy through budget cuts or tax hikes, the already weak economy will take a substantial hit and the process would have been counter productive. On the other hand, if nothing is done, this process will keep on re-accuring, and the inevitable spending cuts and tax hikes will be even worse.

     I think that part of the solution should be to both make long term budget cuts, including in entitlements and defense, and reform the tax code to be more efficient and produce more revenue (read my previous blog posts to see my plans). At the same time, the debt ceiling should be eliminated. Once a budget agreement is reached, the little practical use it had would have been eliminated, and the yearly crisis over raising the debt ceiling would be eliminated. We would no longer be subject to this source of congressional bickering which would trigger the usual shiver in the global markets.

    Unfortunately, based on remarks from congressional Republicans, congressional Democrats, and the White House, the odds of any meaningful agreement are next to nothing. Although the debt ceiling will probably have been raised before the deadline, the uncertainty will probable have taken a toll on the economy, and the seemingly endless quagmire will continue.

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