A Moment of Truth in the Debt-Ceiling Impasse?

by Mario Rizzo

The difference between a conservative and a classical liberal/libertarian once again is manifest.

The conservative wants to get the debt crisis over with even at the cost of some tax increases and not so reliable budget cuts. He thinks that, in the end, there will be some budget cuts, the deficit will be lowered and we can go on to real reform some way down the road.

The radical classical liberal realizes that the government keeps expanding over the long run and that the ordinary politics of compromise has not changed the fundamental course. We now have a moment of truth or perhaps simply of anxiety. This can be used to “force” the system toward real change. The danger, of course, is that the debt ceiling won’t rise in time. In time for what?

First, the debt servicing costs (interest payment) will be prioritized and so the US government will not default on its debt. Other expenditures would eventually have to be cut in perhaps an arbitrary and disorganized way. Hospitals and doctors will have to wait for payment.  Perhaps Social Security benefit checks would go out with less than the full amount. If we are in luck payment the US will cut off its contributions to the NATO Libya operation, and so forth.

A very disruptive picture, to be sure, but a teaching moment?  The problem is what will people learn? That the system is dysfunctional? That the GOP is intransigent about raising taxes on the rich? That the Democrats won’t really cut spending?  It is kind of a wildcard.

My late colleague Ludwig Lachmann used to say that we know people learn from experience but we do not know what  they learn.

I guess the lesson I wish people to learn is just how much they have allowed themselves to become dependent on government. And how unreliable government can be.

The continual duplicity of the US government is evident especially when it comes to foreign policy. Most Americans don’t care about that very much so they can get away with it. (However, why the parents and spouses of killed or wounded Iraq veterans have not been more outraged is a mystery to me.)  If the dysfunction, dishonesty, unreliability and so forth are revealed in the interruption of middle-class “entitlements,” the message might hit home.

But even if the disruptive cuts had to be made it would not be for long. The major political parties have an interest is restoring people’s faith in government.  Without that faith, they are nothing.

I don’t pretend to know the political ramifications of failure to raise the debt ceiling. They might be terrible for the advocates of free markets and limited government. The macroeconomic consequences will be small if the impasse is resolved over a few days to a week. To be sure, markets will react but they will be only slightly affected in the medium run.  The rating of US Treasurer securities would probably be hurt.  This might be a good thing – it would act as a tax on further deficit spending.

27 thoughts on “A Moment of Truth in the Debt-Ceiling Impasse?

  1. I consider(ed) myself to be a (classical) liberal, yet I have difficulty squaring this entire debt ceiling debate with the rule of law.

    It seems to me that when you approve spending, you approve funding through debt, that is, unless you also approve of a law to raise revenue.

    Liberalism to me is not just about the role of government, but also about the process of government. Not raising the debt ceiling, is a violation of process.

  2. I consider myself a libertarian but if it weren’t for the conservatives we wouldn’t be talking about “cutting spending” i.e. Washington speak for reducing the rate of increase. Libertarians may realize that government keeps expanding, but guess what, until they elected to something they are powerless as a political party to do anything. For a libertarian, the Republicans are the only game in town. Republicans are taking a great political risk by forcing the debt ceiling issue. It is easy to criticize them for not going far enough, but if they overplay their hand you may see four more years of Obama with solid Democrat majorities in the House and Senate. The Democrat solution to the balancing the budget will be to increase taxes from the post WW2 historical level of 18% of GDP to the new normal of 25% or greater of GDP. Look for the VAT tax to accomplish this if the Republicans get swept out of office.

  3. If anything (like a refusal to authorize any increase in total debt) throttles government spending in a general way, you may expect the expenditures chosen for reduction to be those that will most motivate voters to support increased government borrowing. It’s no different from the way lines of a budget are chosen for cutting by people forced to reduce the TOTAL budget – the goal is retribution.

    Social-Security payments look to me like an obvious target. And by the way, I’m “on” (collecting) Social Security.

  4. Martin,

    The debt limit makes good Constitutional sense. The Congress is given the authority to borrow, not the executive branch. Without a debt limit the Executive branch could borrow without limit and without Congressional approval. Congress is exercising its Constitutional authority with a debt limit.

    Once the debt limit is reached, appropriations will then have to be funded through tax revenues only. If there is not enough revenue for all appropriations, then some programs and departments will have to operate without being fully funded. Can you imagine a government department not being fully funded and have to actually find a way to cut costs and be run more efficiently? Oh, the horrors.

  5. What would emerge if Mario Rizzo’s mind could have contact with reality?

    The government has entered into obligations, but now you don’t want to meet them. The President and the Treasury Secretary will have to decide which bills to pay – executive power in the extreme. Is this really the sort of thing John Stuart Mill would have advocated?

    Here’s a novel idea: Why don’t we pay our bills, wait until the next election, and let the people decide which programs to cut or expand, which taxes to raise or lower, etc.? If starving the beast is your aim, why don’t you elect Michele Bachman instead of breaking contracts?

  6. Greg,

    We did wait for the election. It was the last election. The people decided they wanted divided government. The government is running a deficit of $1.4 trillion and you are talking about the government paying its bills? Talk about losing contact with reality.

  7. Tom,

    Yes, there was an election, and the advocates of smaller government gained a majority of the House. Does this mean the government should not meet the contractual and other obligations it has already incurred?

    It’s one thing to say that we should reduce our expenses and/or increase our revenues; it’s quite another to say we shouldn’t pay our bills.

  8. Greg,

    You may not be aware of this but the Federal Government has around $62 trillion in financial promises that have not been paid for. These unfunded obligations come to about $530,000 per household. Please tell me how the government is going to be able meet these obligation it has already incurred? I would really like you to tell me how this will happen.

  9. Tom,

    This $62 trillion isn’t due tomorrow; it, or something like it, is the present value of the federal government’s outstanding liabilities.

    You can reduce these liabilities by passing laws that reduce benefits, or you can increase taxes to pay for them. But you can’t, or at least you shouldn’t, stop paying your debts tomorrow just because you don’t think you’ll be able to pay all your debts in the future without passing laws that reduce benefits or increase revenue.

  10. “Without a debt limit the Executive branch could borrow without limit and without Congressional approval.”

    And do what exactly?

    Fact of the matter is, that spending was approved by Congress. The executive therefore has to violate either the debt ceiling or the budget. Either way the executive has to choose which law to follow and which law to break.

    How exactly is this limiting the power of the executive again?

  11. Martin,

    An appropriation is legal authority to spend money. If there is not enough revenue to cover all appropriations this is not a violation of the law. There is nothing in an appropriation that force taxes to be raised or revenues to be increased to meet an appropriation. The Constitution gives the power to issue debt to the Congress. This is the limiting power of the Executive.

  12. Greg,

    When it comes right down to it you are not for the Federal government paying its obligations. You say laws should be passed that reduce these obligations. So, we can take the hyperbole off the table about how the government should pay its bills. The question is only when should the government start reneging on its obligations. A law was passed, the debt limit, will start reducing these obligations immediately, unless of course, another law is passed to override this law. But you say that it should not stop paying its obligations tomorrow, but you leave open next week or next month or next year. The bottom line is you too are for reneging on its obligations, just not tomorrow.

  13. Tom,

    Can’t you see the difference between 1) passing a law that raises the eligibility age for Medicare from 65 to 66; and 2) not paying doctors who have already provided services under the existing Medicare program?

  14. Greg,

    Please expound on the difference between the Obama’s budget which cuts doctor’s pay starting on Jan.1st 2012 and the debt limit which could cut doctor’s pay starting on August 2nd.

  15. Tom,

    If Obama’s 2012 Budget cuts doctor’s pay, it will do so for services performed in the future. The debt limit, on the other hand, would stop on payments for services already rendered.

  16. Greg,

    That is a terrible explanation. After Jan. 1st 2012, doctors will have their pay cut for all services rendered after that date.

  17. I’m late to the thread, but will offer some thoughts.

    (1) Martin conflates law and legislation to great confusion. Law is superior to legislation, and it is the rule of law not legislation that classical liberals support.

    (2) No Congress can bind a future Congress. It is inherent in such a system that a future Congress may renege on commitments of a prior Congress. Congress does it all the time, as when it cuts Medicare payments to doctors and hospitals.

    (3) Adjusting benefits or eligibility (e.g., retirement age for Social Security) is going back on a prior commitment. Since we can’t pay all the promises, that will be necessary at some time. It is no less moral to do it today than tomorrorrow.

    (4) All this is hypothetical because there was never any doubt the debt ceiling would be raised and needed decisons deferred.

  18. In my dream world, we don’t pass the buck anymore. We have the crisis now, and decide how we change the rules of the game once and for all, so that the problem gets fixed once and for all.

    And let there be no mistake, The only way to fix this problem is to chain the hands of the politicans with solid handcuffs. This involves a fundamental and radical change in the rules of the game. As long as the incentives are for politicians to keep kicking the can down the road, they will keep doing so, and sending us right over the proverbial cliff. Watch what happens here. The only thing the politicians will pass this week is the buck. This entire play act will fix nothing. We are watching the slow agonizing death of an ingenious, yet flawed institutional arragement.

    This most recent “crisis” event reminds me so much of the situation leading to the passage of TARP in 2008. At the end of the day, the result was always a foregone conclusion. The same is true here. Politicians almost always do what they are insentivized to do.

  19. Appropriations and the debt ceiling together are law. Congress appropriated money but with the proviso that a debt ceiling not be breached. The upshot is that when the ceiling is hit, goods and services received do get paid for, as sufficient revenue comes in. But further acquisitions, services, and employment must be deferred or curtailed as needed to stay within the revenues. Preferably this would be done in an orderly way. Preferably, as it became clear the ceiling would not or might not be raised, Congress would have specified contingency plans for allocating the available revenue. Ideally, Congress would have simply been allocating available revenues all along rather than spending in a manner insanely unconnected with income.
    I don’t think most of what’s going on in DC has anything to do with conservative versus left-liberal philosophy, at least not on the part of the DC pols. It’s a puerile point-scoring, blame-shifting game among people who for the most part are not all that far apart in outlook and are simply competing for political power for its own sake. If the Boehner sellout doesn’t prove this, then the forthcoming execrable smoke & mirrors deal certainly will. The only people deserving of respect are those few house Rs who stood firm against Boehner, along with a few senators like Rand Paul. They were right to try to use the debt ceiling to force real cuts and real reforms from the political hacks.

  20. For those who are interested in the facts of the debt deal, you can link to the following post at Cato@liberty.

    As the title suggests, there are absolutely no spending cuts in the deal just agreed to.
    There are cuts to the baseline, which means spending will increase somewhat more slowly than would have been the case in the imagined scenario.

    Even that is not, true, however, once interest rates begin rising to more normal levels. The added debt servicing will likely wipe out the hoped-for reductions.

    At this point, future tax increses (including a higher inflation tax) are on the horizon. Or explicit default (rather than the covert default effected by inflation).

  21. From the Cato blog post Jerry links to above:
    “The federal government will still run a deficit of $1 trillion next year. This deal will “cut” the 2012 budget of $3.6 trillion by just $22 billion, or less than 1 percent.”

    So now if you are a committed Keynesian like Paul Krugman, how can you argue that this deal endangers the recovery by cutting spending too much?

  22. Wouldn’t repudiating the debt (or unilaterally renegotiating its terms, if that is the Constitutionally permissible formulation, lowering rats and extending repayment terms) and lowering the debt limit be the only solution. The only way to cut up the federal credit card and so force the tax predator ruling class to either cut the size of the State or attempt to raise taxes directly and so face revolution?

  23. Jerry claims that since we can’t meet all our commitments, we’ll have to break them at some point, and “it is no less moral to do it today than tomorrow.” So, on this reasoning, it’s “no less moral” to stop Medicare coverage for anyone over 55 beginning today than it is to raise the eligibility age for Medicare to 66 in 2025. Really?

    It seems that many libertarians tend to lump things together in this way, a kind of “aggregation of cases” if you will.

    Jerry goes on to say that “once interest rates begin rising to more normal levels,” higher interest costs will wipe out any budget savings. “At this point, future tax increses (including a higher inflation tax) are on the horizon. Or explicit default (rather than the covert default effected by inflation).”

    I think it’s fair to say that this view is not reflected in current market prices. Why hold bonds if interest rates are going to rise and/or inflation is coming or, worst yet, default is a real possibility? Many libertarians praise the informational role of markets, but often discount what market prices, e.g., today’s low 10-year Treasury Bond rates, imply regarding their theories.

    Mario asks, “So now if you are a committed Keynesian like Paul Krugman, how can you argue that this deal endangers the recovery by cutting spending too much?” Easy answer: because, from Krugman’s vantage point, current government spending is already too low.

  24. @Greg Hill: Your reference to “our” commitments appears to reflect collectivistic thinking that libertarians reject. Yes, the political gears turned and generated patterns of mass robbery and coercion that are illegitimate by libertarian standards (and, at the federal level, patently illegitimate by Constitutional standards, notwithstanding the risible pronouncements of black-robed political appointees). And yes, few of us of libertarian bent would care to yank the rug out from under people who were forced to pay into programs and made their life plans around the existence of those programs. A gradual and orderly phasing out would be preferable if attainable. Yet the political failure to implement even such reforms as would make Social Security and other collectivist programs financially sustainable demonstrates the likelihood of a disorderly collapse at some point.

    Regarding the informational role of markets, the point of comparison is with collectivist planning, not with nirvana. If market prices perfectly reflected future reality, there would be no possibility of entrepreneurship and hence no possibility of dynamic change. Furthermore, massive government manipulation of markets distorts the information and restricts alternatives. So yes, the coming price inflation will destroy much of the value of bonds, but when? When to get out? Meanwhile, where else do you put your money? Gold and silver are a hedge, but they are not productive. The stock market fell 500 points yesterday, and it’s hard to imagine it doing well in the current environment of regime uncertainty and political hostility. Real estate remains in the doldrums it was left in by the government-induced bubble/bust.

    I would suggest that rather than take unsophisticated pot-shots at the consistency of libertarian thinking, you might simply offer your own opinions and try making the case for them.

  25. @ Allan Walstad,

    Regarding “our collectivist commitments,” I was responding to Jerry O’Driscoll’s claim that “since *we* can’t pay all the promises,” it “will be necessary [to break them] at some time.” Who do you think Jerry is referring to when he says “we” can’t pay? Perhaps he has a mouse in his pocket.

    You say, “the coming price inflation will destroy much of the value of bonds, but when?” Well, why don’t you take a look at the inflation expectations implicit in 10-year TIPS. Do they suggest to you that inflation will be rampant over the next ten years?

    Finally, while you may wish to “simply offer your own opinions,” e.g., that “the political gears turned and generated patterns of mass robbery and coercion,” I prefer at the moment to focus on some of the internal inconsistencies of the Austrian worldview (parts of which I find quite attractive).

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