Team Obama's Debt Limit Scare Tactics Are Getting Old -- Fast
Published May 19, 2011
Wasn't the world supposed to end on Monday? No, I'm not talking about May 21. But on Monday, the U.S. government officially hit its debt limit, but where are disasters that the Obama administration have been predicting for months? We were warned that hitting the debt limit would be "deeply irresponsible" or “insanity” or “abrupt contraction would likely push us into a double dip recession.” But Americans woke up today to find nothing really changed from last week.
The Obama administration’s scare tactics are getting old. Unfortunately, they keep on getting away with this and aren’t held accountable when their scare stories prove false.
Take the warning Treasury Secretary Timothy Geithner made on January 6th. He wrote Congress a letter asserting: "the debt limit will be reached as early as March 31, 2011, and most likely sometime between that date and May 16, 2011. . . . it is strongly in our national interest for Congress to act well before the debt limit is reached” (italics added). Failure to act before this deadline would lead to "default on legal obligations," "catastrophic damage to the economy, potentially much more harmful than the effects of the financial crisis of 2008 and 2009." Spending will be "discontinued [or] limited" on everything from Social Security and Medicare, U.S. military salaries, Medicaid payments to states, to "forced default on legal [interest] obligations."
The debt limit increase was so critical that President Obama has long opposed any attempts by Republicans to use the debt limit increase to cut the debt, claiming that it had to be a “clean” bill. White House Budget Director Jack Lew told lawmakers in March that it had to be “clean -- it’s irresponsible to do anything but extending the debt limit.”
Well, now we are supposed to forget those warnings. We hit the debt limit Monday, but the problems aren't now supposed to occur for another 11 weeks. The critics obviously were right all along: there are plenty of ways to temporarily keep funding the government, even at its current gargantuan levels, after the the debt limit was hit.
Yet, the Obama administration’s newest predictions about the consequences of hitting the debt limit surely will be no more accurate in 11 weeks than they were this week. A default would be bad, but it is irresponsible for President Obama and his economic advisors to keep claiming that hitting the debt limit means default. The two are completely unrelated. A default occurs only when the federal government fails to pay the interest on the debt that it already owes. Only about 6 percent of spending goes to paying interest, so this is not a great problem.
The federal government still has large revenues. Hitting the limit means that the federal government is prevented from borrowing more. But it can still spend the revenue that is coming in.
Using the White House’s own numbers, the revenue for the 2012 budget year would cover 96.3 percent of all Federal government expenditures in 2007. That is a lot of government to fund. Even after adjusting for inflation and population growth that level of expenditures would be 16 percent greater than what was spent by Bill Clinton’s last budget as president.
To put it differently, using the 2012 budget and revenue numbers for the budget that starts on October 1st, Federal revenues could still cover all Social Security, Medicare, Medicaid and children's health insurance, defense, federal law enforcement and immigration, all veterans benefits, Response to natural disasters, and all interest. There would still be some money left over to be used to fund some other “crucial” operations.
For the 2012 budget, no borrowing means that spending will have to be cut by about 29.5%. The immediate effect of not increasing the debt limit requires somewhat more painful cuts of about 36 percent.
So, with threats of recession, what was the impact of the last big government budget shutdown on the economy? There was a shutdown for five days in late November 1995 and then a few weeks in December 1995 and January 1996. It is very hard to discern any negative impact from those budget battles. GDP actually grew a little faster right after the shutdown than it did before hand (see the figure here).
Republican House Speaker John Boehner wants to cut spending by $2 trillion if he agrees to increase the debt limit by the same amount. Yet, this still means that our federal government debt will increase by over $8 trillion over the coming decade -- over $100,000 for a family of four. We would be better off not passing an increase in the debt limit and not add anything to the $14.3 trillion the federal government already owes.