Never mind New Year’s Eve — Monday is Debt Ceiling Day! According to the best guesstimate by Treasury Secretary Timothy Geithner, the federal government on Monday will reach its statutory borrowing limit of $16.4 trillion — or roughly 104 percent of America’s total economic output.
A legal limit on federal debt was first enacted during World War I and has been increased 13 times since 1995. The most recent increase came after a major political battle in the summer of 2011 — a conflict that also led Standard & Poor’s to strip the United States of its AAA credit rating.
Now we’re back up against it again, thanks to a year when Uncle Sam spent more than $1.3 trillion more than he took in.
Don’t worry, it won’t be Debt Default Eve. Treasury’s bean-counters still have a few tricks up their sleeves. With some clever financial futzing, Geithner says his department can “temporarily postpone the date that the United States would otherwise default on its legal obligations.”
He reckons Treasury can probably squeeze out another two months and $200 billion through moves such as suspending payments into the government-employee pension fund, dipping into a special fund infrequently used to stabilize the dollar or even selling off the nation’s gold reserves.
But then what? March madness in the financial markets if Democrats and Republicans can’t agree to raise the ceiling, perhaps in the current round of fiscal-cliff talks?
Certainly it would be very bad if the US missed a debt payment. Last year, Geithner said a default would “inflict catastrophic, far-reaching damage on our nation’s economy, significantly reducing growth and increasing unemployment.”
True enough, but that isn’t the real risk here — though the ceiling will have to be raised eventually. The feds have plenty of dough to pay bondholders and run auctions to roll over maturing debt. In 2013, according to the Congressional Budget Office, the net interest expense of the US government will be approximately $218 billion, while revenue will be nearly $3 trillion.
And if worst comes to worst, Treasury could theoretically mint several trillion-dollar platinum coins — there are laws covering paper money and coinage made of gold, silver and copper — and deposit them at the Fed. “The effects on the currency market and inflation are unclear, to say the least,” said analyst Jaret Seiberg of the Washington Research Group in a recent report. Right, “to say the least.”
Still, none of this is a real confidence-builder for a US economy still struggling to gain momentum some 3 1/2 years after the official end of the Great Recession. Indeed, some analysts think the uncertainty caused by the 2011 debt-ceiling fight was at least partially to blame for the economy’s summer swoon that year.
But one can hardly blame Republicans, then or now, for viewing the debt ceiling as possible leverage for pushing the Obamacrats to get serious, finally, about cutting spending. If tax rates were left alone, according to the CBO, tax revenue would average about 18 percent of GDP over the next decade, equal to its 40-year average and about $2 trillion more than today’s revenue level.
It’s spending that’s out of whack here. It would average 23 percent of GDP through 2022 under current law — vs. its historical average of 20 percent. And then Medicare really starts to take its budgetary bite. No realistic amount of tax increases could completely offset that.
See, the real debt ceiling is the one eventually imposed by global financial markets at some point on a profligate Washington. When that happens, Congress won’t be able to raise the ceiling even if it wants to. The only options then to avoid a financial crisis will be draconian austerity — both massive tax hikes and brutal entitlement cuts.
To avoid such an extreme budgetary makeover, Congress and President Obama should raise the debt ceiling while also laying plans to cap future spending and reform entitlements. A major fiscal remodeling job would be a great way to kick off 2013.
James Pethokoukis is editor of The American Enterprise Institute’s Enterprise blog