Economic Farce Sifting through today's economic madness

Raising the debt ceiling is worse than not raising it

There is much talk lately about the coming issue of raising the debt ceiling.  Many in congress are expressing their intent to vote against raising the debt ceiling, while others stress the supposed horrible ramifications of not raising the debt ceiling.

I believe that the issue is very simple, and I think the consequences of both actions are clear.  If we raise the debt ceiling, we simply prolong the day of reckoning while also making that day far worse when it does arrive (and it will).  If we don't raise the debt ceiling, we can begin to face the consequences of our reckless past sooner rather than later, and those consequences will inevitably be less than if we prolong them to a future date.

Raising the debt ceiling is akin to applying for another credit card to pay off your current credit card that you cant currently afford to pay off.  Anyone that has ever paid off a debt should understand that this practice is completely unsustainable, and will only worsen the consequences down the road.  At some point, we have to decide to face up to our unsustainable course, and begin to tackle the problem.

What happens if we don't raise the debt ceiling?

This morning Pat Toomey, a newly elected Republican Senator for Pennsylvania, penned an article on just this topic: How to Freeze the Debt Ceiling Without Risking Default.  The article reads:

For months, some political leaders and commentators have argued that failure to raise the debt ceiling would necessarily cause the U.S. to default on its debt. President Obama's Council of Economic Advisors chairman, Austan Goolsbee, recently warned, "If we get to the point where you've damaged the full faith and credit of the United States, that would be the first default in history caused purely by insanity. I don't see why anybody's talking about playing chicken with the debt ceiling."

In fact, if Congress refuses to raise the debt ceiling, the federal government will still have far more than enough money to fully service our debt. Next year, for instance, about 6.5% of all projected federal government expenditures will go to interest on our debt, and tax revenue is projected to cover about 67% of all government expenditures. With roughly 10 times more income than needed to honor our debt obligations, why would we ever default?

To make absolutely sure, I intend to introduce legislation that would require the Treasury to make interest payments on our debt its first priority in the event that the debt ceiling is not raised. This would not only ensure the continued confidence of investors at home and abroad, but would enable us to have an honest debate about the consequences of our eventual decision about the debt ceiling.

I have grabbed some charts from http://www.usgovernmentspending.com to show some of the debt/revenue/interest data in an easy-to-understand visual format.

For fiscal year 2011, the U.S. is expecting to spend $3.83 Trillion, while it plans to have revenues of $2.56 Trillion.  This leaves a deficit of $1.27 Trillion dollars.

Currently, the debt ceiling is set at $14.29 Trillion, and the current debt outstanding is roughly just over $14 Trillion (as of the time of this writing).  That leaves the treasury with just under $300 billion in borrowing capacity before the current debt ceiling is reached.

Interest on our debt outstanding for 2011 will cost roughly $250 billion.  In order for the treasury to continue paying the interest in full for 2011, without incurring any more new debt, it will have to spend $250 billion of its $2.56 Trillion in revenues, which will leave it with roughly $2.31 Trillion dollars left over to pay for the remaining $3.58 Trillion in expenses.

The ultimate reality here is that 3.58 - 2.31 = $1.27 Trillion dollars in cuts that will have to be made elsewhere in the budget in order for the treasury to sell no new debt while still continuing to pay the interest in full.

When we look at the raw numbers, it sounds a lot more difficult than the simple way Senator Toomey describes the situation, but still, I agree with Mr. Toomey.  The only sane option is to face up to this reality now, rather than later when the numbers will be far worse.

At some point we have to put our fut down and admit that we have a debt problem, and begin to face it head on instead of repeatedly kicking the can down the road.

Cutting $1.27 Trillion

While I think the debt ceiling will likely end up being raised anyway, I would like to take a look at some of the things that could be cut were the debt ceiling to stay where it currently is. Let's take a high-level look at where the spending goes (source: http://www.usgovernmentspending.com/year2011_US.html)

Right off the bat I think nearly 100% of the Education spending can be gotten rid of.  Note that I am looking at the Federal column (first column, in black) only.  States would still be spending money on their school systems, but cutting the money at the federal level would get rid of the Department of Education (ED) bureaucracy that is wasting money, and harming the education of our citizens.  Let's say that takes off $130 Billion, just in case we can't get rid of it all.

Next up would be Defense.  We can easily slash defense spending by a minimum of 50% by bringing troops home from places like Italy, Japan, Vietnam, not to mention Iraq.  Not only would this save us boat loads of money ($500 billion!), but it would strengthen our defense.  We are currently spreading our army thin by having a presence in too many places that we don't even need to be.  Let's close up shop, stop making other countries mad at us, save money, and become safer and more defense (rather than offense) driven.  Let's count that as $500 billion off.

Welfare and Pension cuts would need to come next.  Nobody is going to like cutting these, but it has to be done because these programs are unsustainable.  We need to make employees contribute more to their pensions, and even convert them completely to 401k/IRA's where possible (essentially everywhere).  Welfare and Pensions combined are nearly $1.3 Trillion dollars.  We need to face the reality that these programs eventually need to be cut by 100%, but in the interim let's assume 40% cuts.  This gets us another $500 billion.

Finally, the healthcare category needs to be taken care of.  We spend almost $900 billion a year on healthcare spending, which includes things like medicare, medicaid, and provisions from the new healthcare legislation, amongst other things.  The said truth is that medicare is already bankrupt, and more and more doctors are refusing to take medicare because it pays so little.  The cost of these programs is too great, and the benefits are too small for them to continue.  The model is broken.  If we just assume 40% cuts here, that gets us $359 Billion, which brings our total cuts to just over $1.35 Trillion.  Not bad, maybe we can to throw in some tax cuts ;)

These cuts are really just the tip of the ice berg.  We need to abolish the Department of Energy, abolish the DEA, get rid of the Department of Homeland Security (we have barely even had it for an entire decade...how necessary can it be?), which has become essentially the  biggest and most wasteful bureaucracy that we have (with the exception of maybe the DOD).   While we're at it, how about getting rid of the IRS completely in favor of a flat tax (which we work down to a 0% rate).   The TSA surely needs to go as well.  The list could go on and on....

It's actually pretty easy to come up with the necessary cuts, the only hard part is for congress to get the political will to carry them out.  The other side of the coin is educating the American people so that they truly understand the situation we are in.

One sure fire way to create the political will to make these and other cuts happen is to urge your congressmen and congresswomen not to raise the debt ceiling.  If we can prevent the debt ceiling from being raised, we might see what it looks like for Geithner to do something useful.

The cuts sound harsh, but they are coming

The cuts that I have outlined above certainly may sound rather harsh and drastic to some of you, but I want to inform you of the harsh reality of the situation we currently find ourselves in:  These cuts, and probably many more, are coming one way or another.  The only choice we have is if they come by in an orderly and controlled fashion, or if they come chaotically as a result of currency and confidence crisis in the U.S.

No one can say with certainty when the U.S. will face a loss of confidence, but we can say with certainty that unless we change course drastically, it is the path that we are on.  The current path is unsustainable and can only end in disaster without drastic change.  The sooner the changes, the better.