The Debt Ceiling

It is beginning to look as though conservatives are serious about their proposal to refuse to raise the debt ceiling and to allow the country to default on its obligations. This is a serious business and the results could be catastrophic for the economy.

Whenever expenditures exceed revenues, the resulting deficit must be funded by borrowing. Throughout most of its history the government has run an annual deficit and issued Treasury Bonds/Notes to makeup the difference. These are purchased by individuals, organizations, and other nations. They are considered safe investments by investors around the world and as a result the United States can offer these instruments at low interest rates.

Before 1917 Congress had to approve every borrowing, but this was replaced by a debt ceiling, approved by Congress every so often, which allowed for smoother operation. 

Expenditure and debt authorization are separate actions by Congress. The debt ceiling does not place any limit on expenditure in advance—it merely permits  financing of deficits after they have been accrued. The debt ceiling has been raised numerous times in the past and until recently this action by Congress was routine.

Deficits are generally small—except when the country is fighting a war or in the midst of a recession—and the national debt is not a problem. Wars are enormously expensive. Recessions reduce revenue because people are out of work and not paying taxes.

What happens if Congress refuses to raise the debt ceiling to cover deficits resulting from expenditures they have approved? The country's credit rating will be downgraded and investors will demand higher interest rates to purchase our bonds. The increase in interest rates will actually make the deficit even worse. The lack of confidence in the nation's fiscal policies could also do substantial harm in the markets and push the country back into recession.

Defaulting is something you do only once, like losing your virginity. Getting the credit rating back to previous levels after a default would be extremely difficult. Investors would be likely to take a wait and see attitude, meanwhile enjoying a higher rate of return on their investments.

Threatening default has always been an unthinkable option to this point, but it is now a serious threat.

Tags: Debt, ceiling, default, deficit

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Replies to This Discussion

Permalink Reply by Joan Denoo on January 25, 2013 at 7:18pm

Why don't they just go ahead and tax the top 2% and start paying into the system instead of making more debt that will ultimately fall on taxpayers? Why are taxpayers not objecting with a loud noise and finding new candidates for the next election? 

Permalink Reply by Joan Denoo on January 25, 2013 at 7:27pm

Our nation is either one that exploits labor or rewards it. We already know the Republicans want to end social programs as fast and as thoroughly as they can. We see what that kind of thinking does to a society, the evidence is everywhere the USA, The Chicago Boys and IMF persuaded other countries to go that way. Rise in hunger, homelessness, slowdown of business, creation of vast wealth that increases the gap between rich and poor. We know what chaos Neoliberalism produces. 

Small businesses and wage workers take a terrible hit in that economy, conglomerates benefit. Is that what we want for a national value? At some point the 98% can make a difference. Risky? Yes! But if we want surety we should remain silent and not make a fuss. Oh! the price of justice is just too high?

Permalink Reply by Dr. Allan H. Clark on January 25, 2013 at 9:09pm

Part of the problem may be that the economic issues now are too complex for most voters. Many blame "Obama's out-of-control spending," when the reality is the President cannot spend a penny not authorized by Congress. The whole question of the debt limit is beyond most people.

Another part is that the transfer of wealth from the lower classes to the upper classes has been a gradual process that has escaped the notice of most. Kevin Phillips pointed it out over a decade ago and economists recognize it, but for the average person it occurs without much personal effect and he does not notice.

Permalink Reply by Tom Sarbeck on January 25, 2013 at 11:45pm

Dr. Clark, I'm trying to recall the names I once knew for the various forms of logical propositions: converse, inverse and more. There are probably names for these:

1) the reality is the President cannot spend a penny not authorized by Congress,

2) the reality is the President spends the pennies authorized by Congress, and

3) the reality is the President must spend every penny authorized by Congress.

I write this because I dimly remember that President Nixon refused to spend some of the money authorized by Congress but the Supreme Court held that the Constitution required him to spend it all.

Permalink Reply by Dr. Allan H. Clark on January 26, 2013 at 1:10pm

Inverse

The inverse of a proposition A is its complete negation ~A. Every proposition has an inverse. In formal logic either a proposition or its inverse must be true. The easiest way to form an inverse correctly is by placing the words "It is not the case that" in front of it.

Complex propositions may offer several ways of linguistic negation, each with a different meaning depending on the placement of the negative. For example,

(0) Mary likes John because he has red hair

has different negations:

(1) Mary does not like John because he has red hair.

(2) Mary likes John because he doesn't have red hair.

(3) It is not the case that Mary likes John because he has red hair.

Neither the first or the second negations are the inverse of the original proposition, but the third is. (0) and (1) may both be false—maybe Mary likes John because he is tall. (0) and (2) may both be false as well, but with (0) and (3) one must be true and the other false—it either is the case or is not that Mary likes John because he has red hair.

Converse

Not every proposition has a converse. For a proposition in the form "A implies B" the converse is the proposition with terms reversed: "B implies A." 

The most common mistake in logic is to conclude from "A implies B" that "~A implies ~B".

Impoundment

Until 1974 it was considered the President's perogative to impound funds appropriated by Congress, but when Nixon tried, Congress responded with legislation limiting Presidential authority. Since 1974 a President may request permission to impound appropriated funds and Congress may approve or not.

Hope this helps. If nothing else, it clearly identifies me as an academic—who else would be so pedantic?

Permalink Reply by Tom Sarbeck on January 26, 2013 at 11:53pm

No more pedantic than I on parliamentary law, though I'm sometimes either obsessive or fatalistic, and I'm not an academic.

Thanks; I'd forgotten the word "impoundment" but knew "line item veto" wasn't the correct term.

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