08.31.2010 0

The $15 Trillion Debt Cap

  • On: 09/19/2010 20:42:29
  • In: Economy
  • By Bill Wilson

    On the September 16th edition of On the Record with Greta Van Susteren, fiscal hawk Republican Senator Judd Gregg warned that if the $13.4 trillion national debt is not reined in, that the economy would implode. When asked, he said, “That’s exactly what’s going to happen.”

    When? Said Gregg, “Sooner rather than later.” Gregg predicted that “we’re on track right now where we’re essentially going to have a Greek-like situation within five to seven years. Where the international community looks at the size of our deficits and our debt and says, ‘you really can’t pay these off.’” Then, Gregg says, the nation would have three options: inflate the currency, raise taxes, or default on the debt.

    Gregg said that such an outcome is likely because there is no political will in Washington to deal with the specifics of cutting spending. He would like to see discretionary spending frozen, but he does not expect his proposal to go anywhere in the Senate this year. Politics is in the way, he says.

    Most Americans hear that and they’re thinking, “Not good enough.” Is that the best we can do?

    But maybe, the American people don’t even need the Senate, or even the White House to rein in the national debt. Suppose Republicans take a majority in the House in November, but fail to recapture the Senate — a very plausible outcome given the current political climate. With all of the power constraints currently in Washington, what could the House potentially do to help solve the debt crisis now?

    According to the White House Office of Budget and Management, by the end of Fiscal Year 2011, if nothing changes, the national debt will be approximately $15.144 trillion. One option House Republicans might propose is capping the debt there. No more debt ceiling increases after that.

    This would give Congress less than a year after the mid-terms to figure out how to roll over outstanding principal owed on the debt that is coming due. The only way would be gargantuan cuts and a flattened tax code. Consider the following from Strategas Research Partners’ Jason Desena Trennert: “$5.2 trillion of U.S debt comes due in the next three years…”

    That’s approximately 38 percent of the money owed on the $13.4 trillion debt all coming due in three years.

    That averages $1.73 trillion every single year. Right now, the only way to pay that off is to contract yet more debt. This means the government has yet more Treasury auctions and goes deeper in debt — just to pay the debt. The money cannot even begin to come out of revenue, because the debt will increase an average of $1.06 trillion every year for the next ten years.

    Unless the debt ceiling is capped. If it were capped at $15 trillion, it would only be allowed to grow by another $1.6 trillion from where it is today. Prudent measures could allow the Treasury to continue to roll it over (i.e. refinance) without actually increasing it. It just would not be allowed to sell more debt than is coming due in any given year. Interest owed would have to be paid out of revenue.

    The political ramifications of a debt cap would be profound. Automatically, the Senate and President would be forced to balance the budget, or face certain default on the debt. Assuming the House Republican caucus could hold together, as September 30th, 2011 approached, the ante would be substantially raised. It would give them the opportunity to balance the budget — their way.

    A way to do that would be to allot for entitlement spending and keeping the flow of promised benefits liquid to America’s seniors and Boomers. But then, the defense budget would have to be reduced, and then most of everything else would have to be cut considerably. The federal workforce would have to be substantially reduced. Whole departments and agencies would have to be eliminated simply by not funding them.

    The public sector would counter with massive protests, as can be seen now in France, although media coverage stateside has been sparse. French unions struck across the country as legislature there debated Nicolas Sarkozy’s bill to raise the retirement age. Paul Rosenberg at Open Left has proposed similar strikes in response to the upcoming Deficit Commission’s proposals due in December, writing, “This is what resistance to the Catfood Commission should look like.”

    Although such civil unrest against budget cuts would appear likely — it has happened in Greece, too — the American people would not be receptive to their demands to perpetually increase government on an annual basis. When the air traffic controllers struck in the 1980’s, the people supported President Ronald Reagan’s decision to fire them.

    Barack Obama would instantly be under considerable pressure to appease the public sector unions. He would be forced to argue against the debt cap, using the threat of a budget veto and certain sovereign debt default as his leverage. But he would not have the upper hand, since there would be no way to commandeer the appropriations process, which must originate in the House. The federal workforce cannot be paid without that process.

    Moreover, the House need only do nothing in order for the national debt to be capped. They could proclaim it in the form of a resolution stating the sense of the House not the increase the debt ceiling beyond $15 trillion.

    To the threat of veto and default, Republicans could counter that they are preventing the U.S. credit rating from being downgraded and are keeping the costs of servicing the debt from rapidly escalating to untenable levels. Based on Obama’s budget proposals, interest owed on the debt alone will rise to $912 billion annually by 2020 if something is not done.

    Capping the national debt at $15 trillion would give the private sector economy a chance to grow while government would shrink. This would annually in periods of growth gradually reduce the debt-to-GDP level, which now stands at over 90 percent. Over time, that ratio would fall, and the nation’s creditworthiness would rise.

    The White House and Senate would be forced to flinch, or watch the entire government collapse before their eyes in default. A default is infinitely worse than the alternative.

    Republicans would be arguing for funding entitlements, defense, and a few other essential programs. Everything else, they would say, would be left to the states to fill in the gaps along the way in a period of transition.

    It would be a healthy dose of federalism.

    This would entail shifting the regulatory burden to the states, where there are several redundant agencies both at the federal and state levels. Eliminate the federal regulatory bodies, and let states figure out what level of regulation they prefer in most every aspect of the economy and other areas.

    Take the Occupational Safety and Health Administration (OSHA) that exists at the federal level in the Department of Labor, but it also exists at the state level. California has CALOSHA, for example, to enforce workplace regulations. Or, then there’s the minimum wage. States have their equivalents of the Department of Labor, and most of them have their own minimum wage laws. So, just let them enforce their own wage laws and leave the feds out of it. An added benefit is that costly federal mandates on the states would disappear, saving taxpayers billions of dollars every year.

    So on and so forth. The people’s representatives at the state level would decide which government services are essential, and which are not, all within their own means. A Republican majority could argue that this is the constitutional alternative to an ever-expansive federal regime.

    And then once the transition to state control over regulation is complete, and the federal bureaucracy dismantled, dealing with the remainder of future solvency problems in entitlements would become that much more manageable. What to do with those could be subject of the public debate in 2012.

    Not only would this be good policy, it could be good politics, as House Republicans would instantly upon taking the majority demonstrate to the American people they are actually serious about solving the debt crisis, and not waiting around for the Senate or the White House to act. In fact, it would force those other two reluctant entities to act immediately, and present a real opportunity to prevent the Greek-like crisis Senator Gregg is warning the American people against within five to seven years.

    All House Republicans would have to do is pledge to not increase the debt beyond $15 trillion. It’s the only leverage they will have — and their greatest opportunity — to rein in the nation’s untenable budget picture in 2011. They would just have to rally the fortitude to stick together.

    Bill Wilson is the President Americans of Limited Government.

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