Five things to ponder about the U.S. debt limit

Posted Thursday, Sep. 05, 2013  comments  Print Reprints
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The debt limit will be lurking on the horizon like an ever-present cloud bank when Congress returns from vacation next week.

Treasury officials say the limit, currently $16.7 trillion, will have to be raised by mid-October if the U.S. is to avoid a government bond default.

Under George W. Bush the limit was raised seven times by a total of $5.4 trillion, almost always without tendentious debate. In the first two years of the Obama administration it was raised three times, totaling $3.4 trillion, also without a fuss.

In 2011, the GOP took control of the House of Representatives. This once-routine vote has become a recurrent act of brinkmanship.

Here’s a rundown of how to think about the debt-limit issue, in five easy pieces.

• Before 1917, Congress had to vote on every proposed bond issuance, which it considered a pain in the neck. So it chose instead to give the Treasury blanket authority to float bonds, though not unlimited authority.

• The consequences of reaching the limit are dire.

Ruining the U.S. government’s unblemished history of always paying its debts would instantly raise its borrowing costs, placing a heavier burden on its budget and slashing the value of government securities held by individuals, pension funds and other countries.

Government issuance of Social Security checks, Medicare reimbursements to doctors and hospitals, paychecks to military families and vendors would be halted or cut.

The “full faith and credit” of the United States, the preservation of which has made the dollar the world’s premier reserve currency, would be impaired.

• This time around, the debt limit is inextricably tied to a couple of other fiscal imperatives: Congress must pass some sort of funding mechanism to keep the government running past Sept. 30 to avoid provoking a government shutdown similar to those in 1995 and 1996.

One idea is to alter the formula for cost-of-living increases for Social Security beneficiaries by tying them to the so-called chained CPI, a new inflation index that rises more slowly than the conventional Consumer Price Index used today.

There’s no evidence that the chained CPI lives up to its adherents’ claims that it’s more “accurate” than the CPI. The chained CPI’s virtue for budget cutters is that it’s cheaper than the CPI — a benefit cut, imposed by stealth.

• Because Democrats and Republicans are so far apart on fiscal policy, the only way to stave off a debt-limit breach since 2011 has been through sleight of hand.

The original magic trick was the sequester. Enacted to resolve the 2011 debt-limit standoff, this arrangement called for draconian, across-the-board budget cuts starting this year unless Congress worked out more refined measures in the interim.

Congress failed, and the result has been the systematic impoverishment of a host of government programs, with the damage largely visited on moderate-income and low-income Americans.

• The lesson of the post-World War II economy is that the surest way to cut the government’s debt burden is through economic growth.

The federal deficit is shrinking so fast — from 7 percent of GDP last year to a projected 3.7 percent next year — that the risk of a new recession has been heightened, not lowered.

Yet despite evidence that relentless austerity budgeting in Europe prolonged the recession there, scolds like the Peter G. Peterson Foundation want more, calling for another $2.2 trillion in U.S. budget cuts over the next 10 years. That’s on top of about $2.2 trillion in cuts made in the budget and sequester provisions in the 2011 debt-limit deal.

The U.S. economy is growing again, but it’s still ailing. That’s where the risk of another debt-limit standoff lies.

Michael Hiltzik is a columnist for the Los Angeles Times. mhiltzik@latimes.com

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