Raising the Debt Ceiling

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Will the U.S. government raise taxes? Cut entitlements? Both? Neither?
Will they do nothing and let the poop hit the fan?
Is a long-term solution possible, or are we merely delaying the fall of Western civilization?

They'll raise it. It's just a dog and pony show they got going on. They'll strike a deal and cut like a trillion or two off the the budget over the course of 10 years which is essentially nothing, so little they may as well not even bother. Not passing the debt limit would be a great day in American history

There is no doubt that they will raise it. If they don't, then the day of reckoning will suddenly be upon us.

The only remotely plausible long term solution is inflation. Our national debt is about equal to our entire GDP and that number is dwarfed by our unfunded liabilities.

I suspect the ceiling will be raised, but it will do no good.

America needs to make MASSIVE cuts in spending...eliminate several programs not absolutely necessary and restructure the remaining entitlement programs they won't scrap to have a shot at saving the economy. Small cuts only buys a few more months until the accumulating interest hits the ceiling yet again.

I doubt there is the political will to do what is needed to salvage the existing economy. Sooner or later, it will collapse. This might be for the best. When it all burns to ashes, it will be ripe for rebuilding with sound monetary practices. Trying to preserve a failed system filled with graft and corruption just isn't that appealing.

I think that it is shortsighted to expect this fiscal policy issue to be resolved exclusively on the expenditure side. A balance of expenditure cuts and revenue increases is what is called for, for a number of reasons:

1) The United States economy is undertaxed. While low taxes are a laudable goal, it is amply demonstrated that tax cuts are the least efficient way for government to spend fiscal room. At present, tax revenues represent about 24 percent of US GDP (OECD data, 2008/2009). The OECD average is closer to 35%. Only Mexico and Chile have lower effective tax rates within the OECD. There is plenty of fiscal room before the US becomes uncompetitive with its trading partners.

2) That being said, the United States disproportinately taxes corporations. Within the OECD, Korea, Mexico, New Zealand, Japan, the United States, Canada and Australia are the only nations that tax their corporations at higher rates than their citizens. Indeed, the US has one of the highest effective corporate tax rates in the OECD, along with Germany and Japan.

So, on the revenue side, there is fiscal room for the United States to levy more tax on individuals, but not on corporations.

3) The US budget deficit is approximately $1.4tn, and the US GDP is approximately $14.7tn--so roughly 10% of GDP, give or take a few billion.

4) The vast majority of US government spending can be classified in three broad areas: salaries and benefits for public servants and military personnel, purchase of goods and services and transfers to individuals. All three of these spending areas fuel money into the economy: individuals spend their wages or their fiscal transfers on goods and services. Corporations that sell goods and services to the government create employment and distribute profit to their investors. Even the other big ticket items, medicare and medicaid wind up in the economy indirectly, because they go to service providers in the health care sector. Interest payments to domestic debt holders also go into the economy, but with a greater discount, since many institutional investors hold that income as retained earnings.

Now suppose $1.4tn of that government spending did not exist. What would be the impact on the US economy? There is no replacement for transfer programs--no player in the marketplace is going to take up health and social transfers without a revenue stream to support them. Are there alternative markets for the goods and services consumed by the US Government? For some, perhaps, but it would be foolish to assume that manufacturers and service providers are not already exploiting those markets, except, potentially, in the area of military equipment. But who's in the market for new weapons systems these days? Canada's purchase of F35's is not going to make the difference. Without US government procurement, business is going to be shedding jobs at the same time that government is shedding jobs, so it's going to be a buyers market for labour.

I will be generous and assume that the US economy can absorb 50% of the government expenditure being cut--that still represents a 5% retrenchment in the US economy. (And, consequently a retrenchment in tax revenue, too, so to close a $1.4tn budget gap, you actually have to cut a litte over $1.5tn in spending).

Now, I don't pretend that tax increases don't have a similar effect--fewer dollars in people's pockets means few dollars spent at Walmart. But there are mitigations. First, the tax hit can be spread progressively. By minimizing the impact on low and middle income earners, you ensure that the people who spend the highest proportion of their incomes on goods and services continue to have the capacity to do so. Second, the tax hit is spread across the widest possible base. Suppose there are 20 of us living on a street--if all of us take a 5% hit on our take home packet, we all continue to survive--with challenges, surely, but the mortgage is not in jeopardy and there will still be food on the table. But if 1 of us has his job ripped away it's still a 5% cut on the street, but suddenly one family is gone. (Unless, of course, government money steps in to keep the family afloat--in which case the job cuts wind up being a bit of a false economy.)

A massive cut to government expenditure sufficient to address the fiscal deficity would be, in my view, almost as catastrophic for the US economy as a default. But the Republicans seem incapable of looking beyond the revenue and expenditure statement into the knock on effects of their proposals. The Democrats have, at least, put program cuts on the table. I'm in no position to opine on how realistic they are, but at least they are on the table. The Republican intransigence on tax increases is, I suggest, fiscally foolish, and ample demonstration of the maxim that good politics makes bad policy.

And as for the United States' ability to arise, phoenix-like, from the ashes of its fiscal folly, I think you will see the Second Coming (TM) first. The Germans will move expeditiously to kick the PIGS out of the Euro in order to set it up as the primary reserve currency, and you can be sure that neither the Indians nor the Chinese will sit idly by while the United States retools.

The deficit change since 2000 is pretty easily tracked. Unpaid for wars, tax cuts, falling revenue from a bad economy and general spending growth. It's not a mystery in any way.

What's funny is that Boehner can't even deliver the House. He's admitted that nihilistic tea party members won't listen to him so he's representing some fraction of his votes and needs the Democrats to pass anything in the House. Then it has to pass the Democratic Senate and be signed by the, you know, Democratic President.

So he's representing half of one branch of government and is not willing to negotiate? It's very strange stuff. David Brooks called them out for being nuts last week. He suggested they are a protest movement, not a body capable of actually governing.

You heard it here. Tea Party conservatives are in the business of intentionally bringing on the complete collapse of the US economy.

Maybe I'm just too cynical, but it seems as if the Republicans want to make negotiations impossible for Obama. That way, they hope to get Obama unseated in the next presidential election due to all the economic misery caused by the inability to continue social security, medicaid and medicare, and other needed programs. If I'm right, then the Republicans have to have been born without souls for causing the spread of poverty and despair, all for the sake of political advantage.

-Bill, otherwise known as Kraichgauer

You're not the only one who has had that thought.

The pain caused by getting our finances in order now will be way less than the pain we'd all experience in a complete economic collapse if we kick the can further on down the road and I have a feeling it's not that far off on our current path.

While it is not wrong to say BOTH SIDES are using the issue for political posturing, the collapse of the economy is a near certainty.

As I stated earlier, nothing short of pretty much gutting all social programs and restructuring the biggest ones (Social Security and Medicare...to preserve benefits for current retirees but radically change things for my generation [40+] and later ones) will bring government spending into a line where we could recover without a total crash and burn. Military spending could be cut just by putting more fiscal accountability on the military (government contracts are too lucrative) and not allowing senseless wars (Obama's affair in Libya is unconstitutional, illegal, and costing the USA BILLIONS every day we don't have to spend).

As a nation, I feel we don't have the collective backbone to do this. It would be hard on everyone...almost as bad as if the economy crashes and burns. Hence, I see all they are doing now as just a dance to buy a little more time. You can criticize the Tea Party as being bad guys for pushing for economic collapse, but if they realize all that's going on is politics as usual, they are actually doing the right thing pushing for economic collapse....because it's going to happen anyhow and better to get it over with than play games just to maintain a failed status quo.

On the issue of raising taxes as being necessary....I'm not in agreement.

Granted, over 50% of Americans DO NOT PAY A PENNY IN INCOME TAX. This is proven. As the poor increase in number, they get benefits but don't pay in. So, when you criticize tax breaks for the "rich" or say "tax the rich" keep in mind that all the taxes are paid by less than 50% of the tax-paying population and all of them are outside the "poor" group not paying income tax. The biggest criticism of tax breaks for the rich can not be claimed from the "poor" but rather the "middle class" who is not wealthy enough to benefit from most of those tax breaks and are not poor enough to not owe any income tax. The economic war on America's middle class is why America is falling apart. It was the economic strength of the middle class that produced American prosperity and held the hope for people to end up better than their parents had it.

Certainly, we need a simplified tax system. The IRS is little more than a terrorist organization, and the tax code is written to allocate power in the hands of a few. The power to tax is the power to destroy. A simple tax plan = less government bureaucracy and should generate more revenue. Even this is wrapped in class warfare rhetoric. Obama was confronted on his tax plans with the hard proof that higher taxes on the "rich" actually nets the government LESS revenue over the long term, and his obstinate position was that it didn't matter because "fairness" is what counts....not results.

If you try to tax your way out of a failing economy (even as a part of the solution) you introduce a very sharp two-edged sword. Higher taxes discourage economic growth. It drives jobs overseas. It drives business overseas. I've always advocated import tariffs, but you'd have to have to courage to buck the IMF, WTO and other globalist organizations that want a level international trade policy which blatantly favors 3rd world nations because of their cheap labor, lack of regulatory infrastructure and developing telecommunication services. Certainly, we should give huge tax credits to companies that stay in the USA, or even come to the USA, and put Americans to work. Deny those credits to companies sending jobs overseas. That way we tax those who are profiting from hurting the national economy by leaving Americans unemployed. It's not a matter of how well the stock market performs, or how much money any group of companies make for stockholders. The strength of the US economy comes from ordinary people buying goods and services. To do that, they need good paying JOBS.

I think you've confused billions and millions. Libya hasn't cost the US even a single billion yet. It's currently about 40 million a month since we stopped leading the air assault. It's a very inexpensive operation compared to Afghanistan or Iraq and even they don't cost billions per day.



The poor pay payroll taxes, which fund their SS and medicare. Reagan doubled the payroll tax to help ensure those programs would be around.

And if the economy crashes, what happens to America's most vulnerable citizens? Are they just left to their own devices? If so, I hardly see that as a good thing.
And by the way, I don't believe our economy is near collapse just yet. But who knows, maybe I'm just a bleeding heart liberal who thinks letting old or disabled people starve is inhuman.

-Bill, otherwise known as Kraichgauer

That doesn't change the fact that it's an illegal war. I can almost guarantee that at the end of this adventure, we'll be a couple billion in the hole there. Just wait until the inevitable ground invasion happens.

If we don't pass the debt limit, Obama says there might not be enough money for grandma so sad but you know for damn sure that Halliburton's checks will never be in question. Our government values it's war machine and it's big corporate buddies over the it's suffering people at home.

We shouldn't pass a debt limit and we should force the government to put an end to it's global empire.

Last edited by Jacoby on 13 Jul 2011, 1:31 am, edited 1 time in total.

According to the liquidationists, economic collapse and suffering of the most vulnerable is the medicine we have to pay for previous excesses and incompetence. We have to purge the rottenness out of the system by gutting those frivolous social programs. This weeds out the weak so that only the strong survive.

You're off by a order of magnitude. Try a couple of $trillion.
http://costofwar.com/en/