WASHINGTON, October 3, 2013- On Thursday, the Treasury Department released a report warning of the dangers of default—the alleged automatic result of a congressional failure to raise the debt ceiling. Three days into a highly partisan government shutdown and two weeks away from the debt deadline, Congress is in no shape to address such a high-stakes issue, but they soon won’t have a choice.
The debt ceiling is the upper limit on the amount of money that the government can borrow to pay for its legal commitments, like Medicare or military salaries. It has been a congressional tool since 1939, when the beginning of World War II forced Congress to authorize one big number to cover all expenditures instead of the earlier practice of approving debt for specific purpose.
The Treasury Department’s report promised all sorts of doom and gloom if the debt limit is not increased by October 17, including a freeze in the credit market and a severe devaluation of the dollar. “In the event that a debt limit impasse were to lead to a default, it could have a catastrophic effect on not just financial markets but also on job creation, consumer spending and economic growth,” the report concludes, cautioning that a failure to act could cause a financial crisis worse than the one that hit the markets in 2008. The report is just another rock in the recent landslide of messaging from the Obama administration: Republicans, do not even think about messing with the debt ceiling.
The U.S. has never failed to raise its borrowing cap before, but the country has also never approached the deadline with a shut-down federal government, a rabid Congressional brawl, and a bitterly contested landmark law at stake.
In 2011, partisan politics pushed the debt limit increase to the last minute. The markets felt the pressure; consumer confidence and the S&P 500 both plunged. As an indirect result of the brinkmanship, America’s credit rating was downgraded for the first time in history. People have even more reason to fear inaction this time around given the current climate on Capitol Hill.
About a week ago, President Obama indicted Republicans for their reluctance to give the government more room to rack up debt. “You have never seen in the history of the Unites States…the threat of not raising the debt being used to extort a president or a governing party and trying to force issues that have nothing to do with the budget or nothing to do with the debt,” he said.
While it is true that most debt ceiling increases have passed through the Hill without a fuss, Obama’s claim that the debt has never been used as a bargaining chip is actually false. As far back as 1953, fiscal conservatives in Congress have occasionally attempted to leverage their spending demands with the threat of inaction on the borrowing limit.
In the Nixon era, Democrats in the Senate tried to fix a campaign finance reform bill to the debt ceiling hike after unsavory facts about Nixon’s 1972 campaign coffers came to light. The bill was defeated by a filibuster after days of debate, and the Democratic Senators who spearheaded the effort were vilified by the public.
But since then, unrelated bills have routinely been attached to the borrowing cap. Measures from Social Security reform to an amendment allowing voluntary school prayer have found their way into the debt ceiling debate over the past few decades, making Obama’s assertion that the GOP is waging an unprecedented war quite misleading.
In his efforts to downplay the consequences of continuing to inflate the debt ceiling, Obama has assured the public that increasing the limit does not increase the national debt. That is also not true. Raising the government’s borrowing cap allows it to keep running a budget deficit, which is tacked on to the debt at the end of every year.
For all the political panic over hitting the debt ceiling, the actual results of doing so are not that serious. The U.S. has never defaulted on its outstanding debt, and will not if nothing is done in the next two weeks. Instead, not raising the debt ceiling simply means that no new debt can subsequently be incurred. If the government’s borrowing cap isn’t increased, it will be forced to balance its books.
With no more easy money to spend, the government would have to prioritize its expenses, only spending as much as it is collecting over a given period of time. It could no longer pay out sums far greater than its revenues for indefinite periods of time.
The government has estimated that it will take in about $3 trillion in fiscal year 2013. Without an increase in the debt limit, the government’s budget for the same fiscal year could not top that number. Economists have already proven that the government could easily pay for Social Security, federal employee pensions, Medicare, Medicaid, the interest on the national debt, national defense, food stamps, education, law enforcement, and transportation with a budget balanced at that level.
In all likelihood, Congress will vote to raise the debt ceiling. It has done so for many generations, even when contentious items like Obamacare were on the table. Obama and his spin machine will try to convince the public that not raising the debt limit will be the death knell of America, and in turn, the public will heap so much pressure on Republican lawmakers that they’ll have no choice but to cave.
This debt ceiling deadline comes at a time of unprecedented turmoil. But even if it were left untouched, the sky would not fall, as the Democrats would like you to believe.
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