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Robert Reich on the Debt Ceiling

July 30, 2011

I know this is a political post but, in case you haven’t noticed, politics drives what happens in education.  What we have happening right now in Washington is an epic battle between people who want this country to do well, want to have a strong middle class, and want to respect individual’s rights with regard to who they can marry and people who want to destroy anything “they” don’t like in our great nation.  Yes, I am talking about the Tea Party, here is a little primer on members of the Tea Party caucus and where they come from:

A quick examination of the 60 official Members of the Tea Party Congress clears that up: most from very rural and exurban states like Alabama, Texas, Indiana, Kentucky, South Carolina, Missouri, Kansas, etc. These are the folks currently setting the tone and direction of debate on a number of critical policy issues. […]

These are folks coming from states or locations where only 16 percent of the population resides – telling the other 84 percent of us, mostly from cities, what to do.

It is very interesting that these new members of Congress while railing against Government spending have been happy to drink from Government coffers themselves:

Shocker: Anti-government activists are all welfare queens! But they accept the “wealthy white person” version of welfare, which is “farm subsidies.” (The “wealthy white person” version of welfare is also lots of other subsidies and tax credits and government spending.)

According to ABC, “at least 23 current members of congress or their families have received government money for their farms.”

Now on to Robert Reich’s latest post.  I sincerely hope that more people listen to Reich, but I believe right now that one crazy wing of Government is driving this ship and it will not end well.

A friend who’s been watching the absurd machinations in Congress asked me “what happens if we don’t solve the budget crisis and we run out of money to pay the nation’s bills?”

It was only then I realized how effective Republicans lies have been. That we’re calling it a “budget crisis” and worrying that if we don’t “solve” it we can’t pay our nation’s bills is testament to how successful Republicans have been distorting the truth.

The federal budget deficit has no economic relationship to the debt limit. Republicans have linked the two, and the Administration has played along, but they are entirely separate. Republicans are using what would otherwise be a routine, legally technical vote to raise the debt limit as a means of holding the nation hostage to their own political goal of shrinking the size of the federal government.

In economic terms, we will not “run out of money” next week. We’re still the richest nation in the world, and the Federal Reserve has unlimited capacity to print money.

Nor is there any economic imperative to reach an agreement on how to fix the budget deficit by Tuesday. It’s not even clear the federal budget needs that much fixing anyway.

Yes, the ratio of the national debt to the total economy is high relative to what it’s been. But it’s not nearly as high as it was after World War II – when it reached 120 percent of the economy’s total output.

If and when the economy begins to grow faster – if more Americans get jobs, and we move toward a full recovery – the debt/GDP ratio will fall, as it did in the 1950s, and as it does in every solid recovery. Revenues will pour into the Treasury, and much of the current “budget crisis” will be evaporate.

Get it? We’re really in a “jobs and growth” crisis – not a budget crisis.

And the best way to get jobs and growth back is for the federal government to spend more right now, not less – for example, by exempting the first $20,000 of income from payroll taxes this year and next, recreating a WPA and Civilian Conservation Corps, creating an infrastructure bank, providing tax incentives for small businesses to hire, expanding the Earned Income Tax Credit, and so on.

But what happens next week if Congress can’t or won’t deliver the President a bill to raise the debt ceiling? Remember: This is all politics, mixed in with legal technicalities. Economics has nothing to do with it.

One possibility, therefore, is for the Treasury to keep paying the nation’s bills regardless. It would continue to issue Treasury bills, which are our nation’s IOUs. When those IOUs are cashed at the Federal Reserve Board, the Fed would do what it has always done: Honor them.

How long could this go on without the debt ceiling being lifted? That’s a legal question. Republicans in Congress could mount a legal challenge, but no court in its right mind would stop the Fed from honoring the full faith and credit of the United States.

The wild card is what the three big credit-rating agencies will do. As long as the Fed keeps honoring the nation’s IOUs, America’s credit should be deemed sound. We’re not Greece or Portugal, after all. We’ll still be the richest nation in the world, whose currency is the basis for most business transactions in the world.

Standard & Poor’s has warned it will downgrade the nation’s debt from a triple-A to a double-A rating if we don’t tend to the long-term deficit. But, as I’ve noted, S&P has no business meddling in American politics – especially since its own non-feasance was partly responsible for the current size of the federal debt (had it done its job the debt and housing bubbles wouldn’t have precipitated the terrible recession, and the federal outlays it required).

As long as we pay our debts on time, our global creditors should be satisfied. And if they’re satisfied, S&P, Moody’s, and Fitch should be, too.

Repeat after me: The federal deficit is not the nation’s biggest problem. The anemic recovery, huge unemployment, falling wages, and declining home prices are bigger problems. We don’t have a budget crisis. We have a jobs and growth crisis.

The GOP has manufactured a budget crisis out of the Republicans’ extortionate demands over raising the debt limit. They have succeeded in hoodwinking the public, including my friend.  

Again, my advice is: Get Active!  Know who you are voting for!

 

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