If The Debt Ceiling Is Raised, What Changes?

The entire debt ceiling debate boils down to two possibilities – either the United States government will begin to borrow more than $14.3 trillion dollars, or it won’t.

The August 2 date is irrelevant. Despite the atrocious news reporting that continues to insist that there will be at least a partial default on that date (the cable news stations even have countdown timers!), there have been plenty of reports suggesting that the government has received more tax revenues than they expected they would when they announced that date a few months ago, and they should be able to pay the August 2 bills and maybe even a few days more. But even if the government runs completely out of money on some date in August before they figure out a way to borrow more, I really don’t expect it to stay that way forever.

Congress is feverishly working to come up with a plan that at least half of each chamber will agree to, and even though they don’t seem to be making much progress, they don’t seem like they’re going to give up trying any time soon. And frankly I don’t think America as a whole has the will to accept a sudden and permanent 40% cut in government spending (that’s how much spending comes from borrowed money now). As much as my bias thinks this might be better for us in the long run, or at least not nearly as bad as some people think, a lot of people would be hurt in the short run and realistically I just don’t see it happening.

So let’s assume that the government is going to continue borrowing more money, especially since the world still wants to lend it to us, and look at what might change as a result of this debate. The whole point of this debate was that the fresh anti-government-spending wing of the Republican party wanted to squeeze some spending cuts out of the government before kicking the debt ceiling down the tracks again. Whatever final bill that passes both chambers of Congress is not likely to significantly differ from the Boehner or Reid plans being debated this weekend – they already overlap a lot. So if something like that passes, what do we get out out of it?

Unfortunately, not much. The various plans are said to contain savings in the neighborhood of $1-$2 trillion over the next decade. Seeing as we are looking at deficits north of $1 trillion per year for the foreseeable future, chopping off a couple hundred billion from each year still leaves us with deficits that are twice as bad as Bush’s previous records. A lot of the purported savings are accounting gimmicks anyway. Reid’s plan counted savings from winding down wars that were supposed to be happening anyway – conservative columnist Jonah Goldberg has been having a lot of fun with the hashtag #reidmath, though Nate Silver says Republicans have used the same tactic in the past. Boehner’s plan isn’t much better, as only a few billion of its savings come in the first year, and we all know that savings several years in the future might as well not be savings at all (see the original expiration date of the Bush tax cuts).

In short, the amount of savings being discussed isn’t much, the real amount isn’t as big as they’re claiming, and most of the amount that is there probably won’t ever actually happen. And no one is still doing anything about the structural entitlement problems of Social Security, Medicare, and Medicaid that will be enhanced by our shifting demographics. So the likely outcome of this fight is not exactly a success for small government.

Yet this is still by far the biggest consternation over raising the debt ceiling in America’s history – hypocrisy and political bickering notwithstanding. Even if it is raised and our finances end up hardly looking different than if there had been no consternation at all, the fact that we are even having serious discussions about it is, I think, progress. The question is whether or not such progress will happen fast enough to actually slow down the spending train (read my mountain train metaphor) before entitlement payments overwhelm the system, or the world’s appetite for U.S. Treasuries finally wanes. Given the hysteria and incompetence we are witnessing this weekend, I cannot say I am overly confident. But what do I know?