September 23 2012

Bring on the Debt Ceiling Brawl

Vicki E. Alger

Mercatus’ Veronique de Rugy has a novel idea for confronting the looming debt ceiling showdown: bring it on. As she writes in the October issue of Reason magazine:

While many argue that the Standard & Poor’s (S&P) ratings downgrade for U.S. bonds last summer was a direct result of Republican opposition to raising the debt limit without significant spending cuts, the reality is different. It was Washington’s unwillingness to cut spending and put us on a sustainable path, not the melee staged for the cameras, that caused the downgrade. Weeks before the August 2011 debt limit deal, S&P warned that it would downgrade the U.S. bond rating unless lawmakers took credible steps to reduce government spending. S&P laid out clear criteria for avoiding a downgrade: 1) reduce the debt by about $4 trillion, 2) agree to a credible plan within three months, and 3) guarantee this newfound fiscal discipline will stick.

S&P wasn’t bluffing. When an agreement was reached to raise the debt ceiling by $2.1 trillion as part of the Budget Control Act (BCA) of 2011 without the kind of credible debt reduction measures that S&P asked for, the U.S. lost a notch on its AAA rating. S&P correctly concluded that the deal was a joke. The debt reduction package was much smaller than the one demanded by the ratings agency, committing only $900 billion in spending cuts through budget caps, plus another $1.2 trillion in deficit reductions.

Only in Washington would anyone believe that a promise to reduce the debt by $2.1 trillion over 10 years in exchange for $2.1 trillion in new debt right now is fiscally responsible. Especially since all parties were well aware that more debt would be required within the next two years. Even if all spending caps and cuts were implemented, government spending would still grow from $3.6 trillion in 2012 to $5.2 trillion in 2020, including a 10 percent increase in military spending above and beyond war spending.

Rugy rightly notes that “the national debt will crash through its legal $16.4 trillion limit by January 2013” just at our current federal spending rate and

When that happens, both sides of the aisle will be hoping to avoid a repeat of the hysterical debt ceiling showdown in the summer of 2011. …Yes, the fight over raising the debt ceiling last year was brutal. But markets and investors are not afraid of a little political hair pulling and eye gouging. The real horror was that neither side was serious about cutting spending. And for that to change, things are going to have to get a lot uglier. 

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