Tuesday, July 26, 2011

Unexpected answers to simple questions on the debt limit

Question 1.
If maintaining the current debt limit means that spending will not grow, with respect to last year (i.e.: no new spending), then why do we risk "defaulting" this year? Last year we did not "default". Don't we just need to spend the same amount as last year to stay within the current limit?

You will seldom hear the answer from politicians:
Money, in excess to this year's budget (that was never even presented or passed by Congress) has already been spent. In fact, the checks have already been printed. The President and Congress overshoot the debt limit by thousands of billions of dollars. Now they need to vote themselves the legal authority to spend more than what they were allowed to spend, but which they have already spent. Which leads us to...

Question 2.
If the debt limit law was supposed to prevent Congress from spending more than a certain limit, did Congress break the law by spending more than it was legally allowed to?

Congress can play by the rules, or... it can change the rules retroactively, thus avoiding infringing the rules in the first place. We mortals can only obey the rules.

Question 3.
Why would Congress need to raise the debt limit, if at the same time they propose to cut spending by an equivalent, or even bigger amount?

What they really mean is:
For every trillion dollar they need to spend in the next few months, they promise to reduce spending, by an equivalent amount, in what they were planning to spend in the next TEN YEARS! The next congress can then change the rules once the election is over and people will pay less attention to crises artificially created for political gain before elections.

Question 4.
Could government "default in its obligations?"

It really depends on what they mean by obligations. The President and Congress feel "obliged" to regulate, spend and redistribute in many areas that are not enumerated in the Constitution, thus outside their lawful and righteous scope. For example, I may feel obligated to help a family in need. Can take some jewellery from a rich neighbour of mine and use it to fulfill my obligations? Not so. My obligations are only what I am legally required to comply with, not what I think is "right" to do.

In the same way, the obligations of the US federal government are enumerated in the Constitution. Any other federal idea, plan, program, agency, board, commission and service can be defaulted, de-funded, dismantled, deleted, deregulated, and done away with. Cutting such programs is necessary and legal. It is furthermore required by the supreme law of the land.

Question 5.
Would disaster be imminent, if the government did not raise the debt limit?

The President could choose to cause a crisis by continuing to pay for non essential programs and deliberately not servicing the debt. However, he is unlikely to do so. He likes the perks of "command" too much to risk his career on a "blame game."

Question 6.
Why is President Obama so interested in raising the limit?

Did you really believe Obamacare would reduce costs? Think again. The spending projections for Obamacare are now public. Without a substantial increase in the borrowing power, the current administration would not be unable to roll-out Obamacare.

Question 7:
What's wrong with borrowing more?

Apart from economics, any long term borrowing that asks future generations to pay taxes for current expenses is morally wrong as it is equivalent to stealing from others to maintain our habits. In addition, it goes against one of the principles of the founding fathers: "No taxation without representation." Future generations will have to pay taxes without being given the opportunity to decide how the money is (was) spent.

Question 8:
Would people be affected by deep cuts in government services at this time?

People would feel the positive effects of government reduction and tax cuts almost immediately. Our total investment in government has long passed the optimum point, beyond which any simplification of laws, cut in government size and cut in taxation levels is going to produce an almost immediate benefit in the standard of living of the poor, and benefit the economy in general. This is explained in "Economic Optimalism". For a simple introduction, you can check my commentary here.

1 comment:

osbuck said...

I do not think the debt limit should be raised, however, whether it is raised or not, Obama is still calling the shots and we are going down because of it, IMO.