Friday, July 01, 2011

What’s at stake in the debt ceiling negotiations

By Heather Boushey, Senior Economist, Center for American Progress Action Fund

GUEST EDITORIAL republished from the Catholics in Alliance for the Common Good’s website at
Washington is all a-buzz this month trying to sort out how the negotiations over the debt ceiling are going. But, you may be wondering what the big hubbub is all about. Sure, if the U.S. cannot borrow any more money, that may not be a good thing. We all understand what it means to be credit-constrained these days, after all. You, I, and everyone else cannot take out any more funds on the home equity line since the collapse of the housing bubble. But, that’s only the tip of the iceberg. What’s at stake in the negotiations over whether or not to raise the debt ceiling, and if so, at what price, is no less than your future. And this is not overblown hyperbole or an exaggeration.

Right now, the House Republican Leadership is pushing our economy to the brink. It appears – although no one who is not in the not-so-secret negotiations knows exactly – that they are forcing the White House to choose between two potentially very bad outcomes for you and me, and for the Common Good.

Here’s the issue: Congress places a limit on how much the U.S. government can borrow. In some ways, this is nonsensical: Congress has already approved spending through the regular appropriations process. But, even though Congress has already approved the spending, the debt limit forces Congress to vote a second time to approve borrowing the funds necessary for that spending.
It’s akin to going on a spending spree with your charge card. You’ve made your decisions on what to buy, you’ve made your purchases, but then you decide you’d rather not pay all your bills. Um, no, that’s not the way it works.

The White House had proposed a “clean” vote on the debt limit. That is, Congress should increase the debt limit without any additional conditions. This is exactly what has happened 6 times in the past 10 years.

Voting to raise the debt limit is urgent. Right now, the U.S. government revenues are equal to about 60 percent of what the federal government spends. That’s right, 60 percent. The problem is largely the result of lower tax revenues because of the mismanagement of the economy during the 2000s (including massive tax cuts for the wealthy alongside two unpaid-for wars), and the Great Recession and higher needs because of that same recession. That means if the debt ceiling is not lifted, government spending will be immediately reduced by 40 percent. This could take a variety of forms, from withholding Social Security checks, to furloughing massive numbers of federal workers, to not paying government contractors in Iraq and Afghanistan. It’s almost shutting down the government.

And, if the immediate drop in spending doesn’t cause a double-dip recession, the near-certainty of a financial panic, with U.S. interest rates rising sharply and likely staying high for some time to come, certainly will induce a financial panic. Markets need stability and the high-stakes political game the Republican leaders are playing is very risky.

With the near-certainty of economic disaster in one corner, the Republicans have said that they will only vote to lift the debt ceiling if there are large and immediate cuts in spending and they so far are refusing to budge on pairing these cuts with tax increases. This, too, could be bad for you and me, and for the Common Good.

Spending cuts would almost certainly come from discretionary spending. Your middle-school student can look forward to higher college prices, less student aid, and fewer teachers in the classroom. Your community may not be notified of a devastating tornado three years from now because the U.S. will not upgrade our weather satellites. Your neighbor’s toddler may get very ill – and some children even die – from a virulent strand of e.coli as the budget for food safety inspections is cut (yet again). Your brother who currently travels for business every week will see greater flight delays and more near- misses on the runways, freaking him out so much that he quits his job and moves in with you (yikes!).

Of course, there is a way out. Congress could vote for a clean debt limit increase and regroup in the fall to address the long-term budget issues. Addressing the long term issues is important, but is this the way to do it? It feels like the current negotiations are the ultimate case of cutting off America's nose to spite her face. And, why would we want to do that?

--Catholics in Alliance for the Common Good • 1612 K Street NW, Suite 400 • Washington, DC 20006 Tel/fax 202-466-1665 • •

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