01.07.2011 2

The Debt Ceiling Dilemma

By Bill Wilson

Not without spending cuts. That was House Speaker John Boehner’s response to Barack Obama’s request to Congress to increase the national debt ceiling from its current $14.294 trillion level.

“The American people will not stand for such an increase unless it is accompanied by meaningful action by the President and Congress to cut spending and end the job-killing spending binge in Washington,” Speaker Boehner said in a statement. He explained, “While America cannot default on its debt, we also cannot continue to borrow recklessly, dig ourselves deeper into this hole, and mortgage the future of our children and grandchildren.”

“Spending cuts — and reforming a broken budget process — are top priorities for the American people and for the new majority in the House this year, and it is essential that the President and Democrats in Congress work with us in that effort,” Boehner concluded.

This is a courageous stand to take, and Americans for Limited Government applauds Mr. Boehner’s efforts to bring the nation’s fiscal house into order.

This means that spending cuts of some size will be attached to the debt ceiling increase. How large? As compiled by the Wall Street Journal, Senate Minority Leader Mitch McConnell called for “something significant”. Senator Orrin Hatch said “meaningful and significant spending cuts” must be attached. House Ways and Means Chairman David Camp and Representative Mike Pence too echoed Boehner’s call to attach spending cuts to the measure.

In fact, House Republicans will have two opportunities this year to extract spending cuts from the Senate and White House: the debt ceiling increase and the continuing resolution that expires on March 4th. Treasury Secretary Timothy Geithner warns that the debt ceiling could be reached by March 31st.

We would suggest that both votes should have cuts attached to them large enough to at least cut the $1.3 trillion deficit in half as a starting point. That would mean at least $325 billion in cuts in each of the two votes, shrinking the budget deficit to about $650 billion. Then, when the FY 2012 budget is formulated, hundreds of billions of further cuts can be proposed to get closer to a balanced budget.

That would leave Harry Reid and Barack Obama with a choice: To accept the increase in the debt ceiling accompanied with the cuts, or to refuse. The burden will be on them, and the blame would be on them should they fail to raise the debt limit, because the House will have done its job.

Of course, if they refused, Reid and Obama would also be faced with a dilemma, namely: What would happen if the debt ceiling were not raised?

Critics claim that the nation would default on its debt. But that really depends on how the Obama Administration would deal with the situation. A default would only occur if the White House opted not to use the limited resources available to pay interest on the debt, and if somehow it could not refinance existing debt.

For certain, if the debt ceiling is not increased, the Treasury would not be able to contract new debt on the bond markets. It would only be able to refinance existing debt, albeit at diminishing levels over time because when debt comes due, so does interest owed on that debt. In 2010, that interest cost $228 billion, which contributed to the $1.3 trillion deficit for the fiscal year.

So, in order to keep refinancing without default, interest owed would most certainly have to come out of annual revenue, which in 2010 totaled about $2.2 trillion. That would leave about $1.9 trillion of revenue to pay for $3.3 trillion of spending, which could not be borrowed. Critics also say this would mean that entitlement spending would be stalled: Social Security checks could not be dispensed, and Medicare would seize up.

This doom saying is more than an exaggeration. It is a lie. Those checks would only fail to go out if the Obama Administration decided to spend dedicated revenues for those programs on something else.

The IRS collected more than $815 billion in Social Security and Medicare dedicated payroll taxes in 2010 to pay for $1.166 trillion in benefits. The $351 billion shortfall had to be borrowed, which did contribute to the $1.3 trillion deficit. But it need not have been borrowed from the bond market. The trust funds for these programs have more than $4.629 trillion of U.S. treasuries, roughly one-third of the national debt.

These IOU’s could conceivably be redeemed, and the Treasury could refinance those obligations without adding to the debt per se, and the two senior citizens entitlements would be fully funded for 2011. Of course, if the $4.629 trillion of trust funds had to be tapped to pay for all shortfalls in Social Security and Medicare from 2011-2020, they would be depleted before the decade’s end. Why? The programs will pay out $16.3 trillion in benefits, but only collect $11.397 trillion of revenues according to the Office of Management and Budget, a $4.9 trillion shortfall by 2020. The $4.629 trillion trust funds would run out in 2019.

Even so, if the Obama Administration opted to keep Social Security and Medicare fully funded by dipping into the trust funds because of the debt cap, it would have about $784 billion left over from revenue to pay for the rest of the budget of $2.3 trillion. That’s where the real pain would likely be felt: the military, the vast federal bureaucracy, departments, and agencies, Medicaid, SCHIP, civilian and military retirements, veterans’ benefits, education spending, unemployment insurance, food stamps, the earned income and child tax credit, and a host of other corporate welfare subsidies, bailouts, and local pork.

Of course, that would all be on Reid and Obama, who refused to raise the debt ceiling.

So, Reid and Obama would consciously be choosing between a House Republican offer of perhaps $325 billion of cuts and a debt ceiling increase, or $1.5 trillion of cuts if they refuse. The choice is theirs, and so would the blame, since Republicans would have been the ones doing the responsible thing, and the Democrat Senate and White House were the ones who said no.

Bill Wilson is the President of Americans for Limited Government.

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