The Debt-Limit Mess

The Debt-Limit Mess
by Sheldon Richman, July 22, 2011

The U.S. government has run up a debt of more than $14 trillion, nearly the size of the economy's annual output -- and it's not enough! So the politicians want to borrow $2.4 trillion more. But the need congressional authorization. That's what Washington is in a tangle about these days.

For 94 years Congress has set a limit for the government's borrowing. But raising the limit was usually a mere formality. In other words, it was no limit at all, and government felt free to borrow at will. Among the effects of borrowing is bigger government. The current U.S. budget is $3.8 trillion. The government is borrowing 40 cents of every dollar it spends. Now imagine its having to raise the full $3.8 trillion in taxes. Borrowing permits a growth in government that would be virtually impossible otherwise, because some portion of government spending ­ the portion borrowed ­ appears free.

Of course it is not free. Borrowing brings several kinds of costs, but they lie in the future or are hard to discern. One cost is interest, which last year came to more than $400 billion. A second cost is higher interest rates. When the government is in the international capital markets looking for money, it adds to the demand for limited lendable funds and bids up interest rates for everyone else. A third cost is related to the last. When the government borrows money, no one else can borrow that money. Thus, private projects, which ultimately would have aimed at satisfying consumers, must go unfunded. That is a real loss in welfare, but it is unseen. We are poorer as a result.

To most pundits and politicians, the "grown-up" position is to favor increasing the debt ceiling, which stands at $14.294 trillion. Paying Mastercard with Visa is considered responsible, and anyone who says otherwise will be branded an extremist, if not a nihilist who wants to bring down the economy. We are in a pretty sorry state if thinking the debt is big enough gets that reaction. It can be chalked up only to an ethos ­ fostered by the government's own schools, of course ­ that regards the state as the first claimant on all income.

So the debate in Washington is not whether the ceiling should be lifted but under what conditions. Republicans generally favor raising the limit as long as some spending cuts are promised. The Democrats want increased tax revenue along with spending cuts. Thus the impasse as the August 2 deadline approaches.

What should they do? What they should not do is raise revenue in any way. Taxation is the forced extraction of money, an immoral practice. If you and I can't morally demand money from our neighbors with a threat of force, neither can the politicians. If I max out a credit card, I cannot legally steal money to make my payment. Why can the government? Of course the legal rules are different for the government, but that is what we should be objecting to. The government is a group of people, so the rules should be no different.

Over many years the policymakers have dug the hole that they are now trying to climb out of. The hole, let's be clear, is the result of government spending, not insufficient taxation. Federal spending is close to 25 percent of GDP. Those who want to raise taxes complain that revenues are at a historical low of 16 percent of GDP, but they have conveniently forgotten that the economy has not recovered from a deep recession, in which unemployment depressed revenues. Typically tax revenues are close to 20 percent of GDP regardless of tax rates.

The problem is not on the revenue side. Indeed, the government shouldn't be taking any money by force. But in the short term, if the self-proclaimed wise men and women in Washington feel they have to pay the bills they have incurred in our names, let them reallocate spending without borrowing new money. They can start by liquidating the empire and cutting the military-industrial complex off from the public trough. All spending, including Social Security, Medicare, and Medicaid, should be on the chopping block. But then, instead of paying the bondholders, let the taxpayers keep their money.

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