September 30, 2014

Hitting the Debt Ceiling is Not the End of the World

End of the World

The Obama administration has been claiming that failure to raise the debt ceiling would be the end of the world. We are all tired of failed apocalyptic predictions. Perhaps all that will end is politics as usual.

In 2006 Senator Obama voted against raising the debt ceiling. He said, “The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. Leadership means that ‘the buck stops here.’ Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better. I therefore intend to oppose the effort to increase America’s debt limit.”

The speed at which we have increased our debt in the last few years is frightening. The Obama administration added more to the debt in its first two years than the Bush administration did in its entire eight years. This is clearly a failure of leadership.

Just because we reach the debt ceiling doesn’t mean we have to default on our debt obligations. What it means is that the decision of what gets spent and what doesn’t will be squarely on the administration. Reaching the debt ceiling only means the money being spent must not be greater than the money coming in. In other words, we can’t be adding to our debt.

It is like members of a family mired in credit card debt who have reached their $10,000 credit limit. They are not allowed to deficit spend by charging any more on their card. But they still have salaries coming in. They still are obligated to pay the interest on their debt. And after paying that interest they still have money left over without defaulting on their debt. It won’t be a catastrophe. It will be forced austerity.

The federal government collects about $200 billion every month. Interest on the debt costs less than 10% of that amount. The government could service the debt and still have over $180 billion to spend on essential services. The administration has the discretion to decide what is essential without consulting Congress.

In order not to default on its debt, the Obama administration must simply decide to pay the interest. With the remainder, it will have some more difficult decisions. Nearly all of the promised expenditures are sacred cows of the Democrats. They will have to make the tough decision of which ones to fund and which ones to cut.

Perhaps they will try to push Congress and the American people by delaying Social Security checks. I hope that political tactic would fail to hoodwink Americans. Social Security checks cost $49.2 billion. There is obvious pork that should be eliminated long before Social Security.

Leadership at this point could do what every business must do: cut the least essential spending and become more efficient. The judgment of “least essential” is both a political evaluation (getting reelected) and one of statesmanship (what is best for the country). It would certainly be a test of leadership because the administration would have the freedom to withhold Social Security, cut the military or try to eliminate waste.

Handled correctly, officials in the Obama administration could clinch reelection. They could use this as an opportunity to eliminate funding to National Public Radio and the National Endowment of the Arts. They could ask federal employees to contribute more toward their own retirement. They could reduce the size of the federal payroll. And by doing so, they could regain the confidence of middle-class Americans whose primary complaint is that Obama has engaged in the worst runaway spending in the history of the country at a time when we can least afford it.

Consider again the analogy of the family approaching their $10,000 credit limit. I’ve had some experience counseling people in credit card debt. Most of them spend money that families with a millionaire mindset would consider profligate luxuries. When asked what they would do if they truly went broke, they admit they would have to eliminate these expenses. But they refuse to do so before running out of money.

The current administration shows the same irresponsibility. Obama does not need to wait for an act of Congress before he starts eliminating or trimming wherever he thinks cuts could be made. He has had the power to do so for the past two and a half years. Instead, he seems bent on continuing to accelerate toward the debt ceiling as quickly as possible. I’ve never found a better way of changing behavior than the shock of paying cash for everything you buy.

Asking to go further into debt is not “compromise.” The only debate should be what needs to be cut. As a libertarian, I see very few government programs that do more good than harm. And the few that do some good nearly always have a private company or charity that does it better. We shouldn’t compromise on going further into debt any more than a wife should compromise on how faithful her husband should be. Reducing the number of deficit affairs doesn’t really make government a faithful steward.

As a compromise we could save $20.2 billion a month by eliminating the Department of Education and $31.7 billion by eliminating defense vendors. Those are much better compromises than how fast we should go deeper into debt.

Neither does it make sense to compromise on tax increases. Every statistic imaginable shows this is not a tax revenue problem, it is a spending problem. Perhaps in another column I will lay that case out in more detail, but for now, everyone without a partisan ax to grind knows we could tax 100% of this country’s production and all it would do is drive tax revenues to zero.

And finally, government spending does not stimulate the economy. Government spending is part of the problem, not part of the solution. We can’t spend our way into prosperity any more than a family in credit card debt can. Government spending puts brakes on real economic activity as it competes with the private sector. Asking for additional stimulus is like trying to climb a hill more quickly by stomping on the brake.

If the debt ceiling is reached, the consequences will be large but not entirely harmful. The dollar will strengthen. The interest rate you get paid for your money will sharply rise. The stock market will drop simply because it will take fewer dollars now that they are more valuable to buy a share of stock. Prices will drop for the same reason.

All the dire consequences of not raising the debt ceiling pale in comparison with the dangers of continuing to add to our deficit. I’m certain that partisan forces will push for the worst possible consequences if a deal is not reached, but I’m hopeful that the average American will not be snookered.

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About David John Marotta

David John Marotta+ is the Founder and President of Marotta Wealth Management, Inc. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. Favorite number: e (2.7182818...)

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