Republicans and Democrats failed to reach a deal on raising the country’s debt ceiling over the weekend, stoking fears on international markets that America’s credit worthiness could fall into serious disrepair.
The credit rating agency Standard & Poor’s recently warned the U.S. that comprehensive reforms to cut spending and raise the debt limit are needed in order to prevent a downgrade in the country’s AAA rating. Proposals coming out of Congress, however, seem to be splitting down partisan lines and President Obama has not been successful at brokering a deal.
House Speaker John Boehner is expected to propose a plan that would raise the debt ceiling by $1-trillion dollars now and another $1.6-trillion once Congress successfully enacts an equal amount of spending reductions. Senate Majority Leader Harry Reid, on the other hand, is proposing a package that would reduce spending and increase the debt limit all at once, in order to postpone future negotiations until after the 2012 election.
Markets are rightly nervous about America’s ability to get its fiscal house in order, but doomsday scenarios about the world ending if the Aug. 2 deadline is missed have been highly exaggerated. If the Aug. 2 deadline is missed, it does not automatically mean that the U.S. defaults.
The government does have the ability to prioritize payments and continue to pay entitlements and wages. It also has many assets, including all the TARP assets that were acquired during the financial crisis, which could be liquidated in order to pay the bills.
That is not to say that this issue is unimportant or that defaulting on the American debt would not be devastating for the world economy.
Some are even arguing that it would be better to let the deadline pass than to make such an important public policy decision in such a short period of time. “One of the problems with America over the past decade is we’ve constantly been running from panic to panic… and we have to pass a bill that’s going to bind us for the next decade in a couple of weeks,” said Reason magazine editor Nick Gillespie on Friday’s episode of Real Time. “This is no way to run a government.”
But politicians have had plenty of time to work out a deal. In fact, they have already missed three so-called deadlines, which passed in March, April and May. Back then we heard the same stories about the looming Armageddon and each time the Treasury Department was able to finagle its way into setting a new deadline. And if one listened hard enough, you could almost hear politicians in Washington breathing a collective sigh of relief after each deadline passed.
The problem is that, if politicians have been unable to reach a deal since the last deadline passed in May, there is little reason to believe another extension will make any difference. And yet, it remains indisputable that America’s fiscal situation is unsustainable and serious reforms are needed in order to prevent the country from falling into a debt crisis.
Over the past decade, the country has increased spending by 60% and Congress was forced to raise the debt limit 10 times. The $14.3-trillion in debt that has been accumulated represents close to 80% of the entire economy.
Most people who run their household finances understand that you can’t spend money you don’t have forever. Eventually you need to pay your bills. Unfortunately, many of the politicians who created this mess are now the ones responsible for cleaning it up. This does not bode well for the prospect of any meaningful reforms; now, or in the future.
Photograph courtesy SS&SS'/flickr