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Minnesota 2020 Journal: Debt Ceiling Shell Game

July 29, 2011 By John R. Van Hecke, Executive Director & Fellow

Here, in Minnesota, we suffered an ugly political stand-off. You’ll remember the angst, the hand-wringing, the high-stakes game of chicken, concluding with a profoundly unsatisfying result. I’m still exhausted from the experience and now, I’m plodding through the national version.

If you’ve been fortunate, leading a three-week backcountry hiking trip and blissfully disconnected from the omnipresent news feed, then you probably don’t know that Congressional House Conservatives are determined to force a harsh, cuts-only budget balancing plan on our nation in return for raising the national debt ceiling. It’s an extreme measure that amplifies a modest fiscal management measure debate into a global foundation shaking stand-off.

Here’s the deal. The U.S. issues Treasury bonds—promissory notes—to finance the many activities that Congress has authorized. We’ve been spending more money than we receive in revenue for quite some time. Normally, this isn’t a problem, but during the second Bush Administration, the U.S. government committed to two wars and massive tax breaks for the wealthiest Americans, expecting to pay for it through borrowing. The Chinese government, rolling in so much revenue that they quite literally can’t spend it all and yet are unwilling to improve China’s social services safety net, purchased and continues purchasing U.S. T-bills, financing our wars and our tax breaks. We need them to continue buying U.S. debt at a very low cost.

Along with Denmark, the U.S. is the only developed, industrialized nation that requires congressional action authorizing federal borrowing to finance congressionally directed spending. This additional step isn’t the worst idea in the world but it represents a belt-and-suspenders approach to democratic decision making. Congress votes to authorize spending and borrowing to finance spending. Most nations cover that latter when they decide the former.

Congressional conservatives are using the debt ceiling limits—a procedural chokepoint—to force spending reductions. Unless Congress raises the debt ceiling, the U.S. defaults on its bills. That would be bad. It would rattle global financial markets, raising doubt about the U.S.’s willingness to pay its debt obligations and, in the process, raises expenses on every American and every American business as uncertainty quickly translates into higher borrowing costs.

Here’s the policy question’s nut: does the cost of market uncertainty plus the cost of dramatically slashing the federal budget outweigh the cost of raising the debt ceiling? But, as much as this should be a straightforward policy debate, it’s not. This is a political theater pretending to be thoughtful public policy discourse.

Congressional House Republicans are divided on the issue. One faction really seems to believe the Tea Party press releases and demands harsh, immediate spending reduction measures. They are willing to default on the bills to force policy compliance. The other faction seeks maximum political pain for Congressional House Democrats, preferring a difficult debate and debt raising vote now and again in a year, in return for raising the debt ceiling. The second group is playing a shell game with both President Obama and the very conservative faction.

The shell game is a confidence scam. Whether using three playing cards, three walnut shells and a pea, or three cups and a marble, it’s simply a mechanism for separating the mark from his money. It’s not an honest game of chance; it’s fraud. The wagering participant has no chance of winning yet the game operator’s persuasive skill convinces the participant that winning is a realistic outcome.

The game operator creates a duplicitous environment, inducing participation with the promise of a seemingly easy result. Slight-of-hand and verbal/visual misdirection ensure that the participant is not allowed an honest competition.

Conservative policy advocates, hoping to maintain generous tax cuts for the wealthiest Americans, are trying to convince the American public that they are best served by giving rich folks a pass and bearing the cost-cutting burdens themselves. If this seems absurd, so is betting $20 with some guy sliding three bottle caps around on an upturned cardboard box. Rather than think, “Hey, I know the pea’s location,” you should think, “Hey, this is a scam and the game operator/richest Americans are conning me out of my money.”

The responsible, reasonable public policy solution—reduce the national budget deficit and, by extension, the national debt, through a balanced approach that combines spending cuts with revenue increases, largely through discontinuing huge tax breaks for the richest Americans—isn’t a con. It’s public policy that focuses on America’s interests.

In Minnesota, we've been reducing spending but haven't raised new revenue. As a result, Minnesota’s credit rating is suffering and this year's budget borrowing risks slowing Minnesota’s economy even further.  America can learn from Minnesota’s missteps. If we focus on what really matters, America and Minnesota move forward.

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3 Comments:

  • Legender says:

    August 2, 2011 at 8:03 am

    It is an absurd occupation to pull in pennies from the many when you could pull in pounds from the few. And, I would add, that pulling pennies from those who only have pennies in disposable income causes hardship, whereas pulling pounds from those who have much more, hardly makes a difference to them. They do not have to choose between rent and food, or heat and food, or medical care and food!

  • Bernice Vetsch says:

    August 2, 2011 at 4:26 pm

    Since I first heard of The People’s Budget a week or more ago, I’ve been trying to get media outlets to take a look at it and to consider writing articles or op eds to inform the public of it.  No luck. 

    The People’s Budget was developed by the Democratic Progressive Caucus and released at about the same time as the Paul Ryan Budget-to-Destroy-America. The Ryan plan was widely discussed in the media as a “serious effort” to solve our budget problems.  The People’s Budget was ignored not just by the media, but it would seem by the Administration and the Congress as well. 

    In ten years, The People’s Budget would achieve a $5.6 trillion deficit reduction, spending cuts of $1.7 trillion (much by ending our endless wars), revenue increases of $3.9 trillion (by raising taxes and eliminating corporate welfare), and public investment of $1.7 trillion for JOBS in much-needed clean energy, infrastructure, broadband, housing and R&D. 

    No cuts to valuable programs would be required. NO ONE would be hurt. What has become of our country??

  • Mike Downing says:

    August 4, 2011 at 2:17 pm

    It’s a good thing they lifted that debt ceiling. The U.S. Treasury promptly borrowed $238 billion, to raise our total debt to more than 100% of our gross domestic product.

    The new borrowing took total public debt to $14.58 trillion, over end-2010 GDP of $14.53 trillion, and putting it in a league with highly indebted countries like Italy and Belgium.

    The last time US debt topped the size of its annual economy was in 1947 just after World War II.
    It certainly is a good thing the Democrats didn’t give in to the “Tea Party terrorists” who think we’re borrowing too much money!—Powerline