Debt Ceiling Thoughts

From the public signals, it seems as thought the President and Democratic leadership are trying to reach a reasonable deal with the GOP, but are ultimately determined to avoid a default on US debt or ratings downgrade no matter what the price.  They'll agree to huge cuts to Social Security, Medicare, and other parts of the social safety net if that's what it takes to avoid a default.  I sense that part of the GOP gets this and is going to milk them for all they're worth. That means that the Democrat's only hope are what Tom Egan calls the "tassled-loafer" Republicans (others would characterize the GOP split as crazies v. cravens), who are also desperate to avoid a default. 

I'm well aware of the costs of a US default; it will undoubtedly hurt the economy, and not just the financial economy, but the real economy.  It could also affect the distribution of social safety net benefits. But those costs have to be balanced against the costs of gutting the social safety net. The former costs will not be long-term; the latter costs will be more or less permanent. There seems to be surprisingly little discussion about whose ox will get gored under each of these alternatives. 

Opting to gut the social safety net to prevent a default is a choice to protect the upper and middle classes--the wealthy and the employed--and the and screw not just the poor, but retirees and the large segment of the population those who are working jobs that do not pay enough to allow meaningful retirement savings or adequate health care. Put differently, sacrificing the social safety net to avoid a default is opting to favor those who need help the least at the expense of the most vulnerable in society. Not surprisingly, there is doesn't seem to be a voice at the table arguing for preservation of the social safety net as a priority greater than preventing a default.  There is, of course, a reasonable level of trade-off, but I worry that the Administration has gone well beyond that.  We should recognize that this is a serious choice about what we want America to be. 

Comments

[Transor Z]

I remember a Doonesbury strip from the Reagan years as the budget deficit counter-intuitively ballooned under GOP leadership and the strip pondered whether the deficit was being used as a tool to jack social safety net spending.

Has there been a game of chicken Obama hasn't lost during his presidency?

[Ken Doran]

"Middle class" is highly slippery term; it can easily include almost everyone from the 25th to 98th percentile depending on who is doing the defining. Actually, defining is often unhelpfully dispensed with. To suggest that "opting to gut the social safety net", as today's Republicans seek to do, is good for the middle class is true only if the middle class as you define it fall solely in the highest decile. Maybe not even then.

[Leslie]

I cannot thank Professor Levitin enough for framing the issue in these terms. This matter-of-fact and concise post provided for me a light bulb moment.

As a progressive, liberal, (etc.) it has been confusing for me to look around and see that my progressive chums are terrified about a default, while the crazy wing-nut conservatives seem willing to let it all crash. It's confusing for me because it is as if my thoughts are aligning with the crazy righties-which NEVER happens to me.

(Actually, come to think of it, this DID happen to me one other time. TARP. I didn't want TARP, but most of the other folks who did not want TARP were the folks who, generally, terrify me.)

Nevertheless, with just two sentences, Professor Levitin articulately and efficiently summed up why it is that my thought process is not in alignment with that of my "base" at this time:

"But those costs have to be balanced against the costs of gutting the social safety net. The former costs will not be long-term; the latter costs will be more or less permanent."

In the short run, I am willing to allow the infliction of a little extra pain to the "not-socioeconomically disadvantaged" to ensure a social net for everyone in the long run.

No cuts to Medicare, no cuts to Social Security, no cuts to Medicaid.

To my Democratic/Progressive/Liberal pals I would say this: Not every hill is worth dying on. This one is.

[Santa Maria Short Sale Agent]

I just don't think touching Social Security and Medicare are the way. There has to be another way. The middle class are just giving and giving and giving. You hit the nail on the head saying this is about what we want America to be. That is exactly what this is about.

Bailing out the banks way a very recent mistake inspired by fear and chaos. If this happens this will be another.

[AMC]

Who contributes more to political campaigns: "the upper and middle classes" or those utilizing the social safety nets?

There's your answer.

[mt]

This doesn't have anything to do with creditors and debtors.

I don't see how anyone can write about these issues without using any numbers. All spending, taxing, borrowing, and all economic activity to fund that spending, pay those taxes and repay that borrowing, are denominated in dollars. And the first three have to reconcile to the fourth over the long term. So any statements about them, to be actionable, should contain dollars and balance out over the long term. Unquantified assertions, from left or right, don't add to our understanding of the problem and likely reduce it by reinforcing beliefs that are unsupported by quantitative analysis.

Calling what is going on "gutting" or "sacrificing" the "social safety net" are extreme overstatements. Social Security, Medicare and Medicaid are projected to grow in every scenario under discussion.

This post shows no consideration of how default might cause either (1) a rise in interest rates - even 1% on a debt of $15T is $150B a year (times X years - 3? 5? 10?) - that causes debt service to further crowd out other programs, including the "social safety net"; and (2) a dramatic hit to the global financial system, in which Treasuries underpin much of the (a) liquidity of large employers, through the repo market, and (b) the capital of financial institutions all around the world, which might cause a severe drop in global economic activity, causing tax revenue to fall at a time when -- given the default -- the provider of the "social safety net" is unable to borrow to replace them (even while the claims on the "social safety net" likely increase).

Right now, the US pulls in about $1.4T in taxes, and spends about $2.4T. It covers the rest through borrowing. If it defaults, you can kiss the second sentence goodbye, and we'll be in a world where tax revenue is also likely not capable of significant increase, meaning that spending will have to drop by an amount (approx $1T), and a proportion (approx 40%), not seen in our lifetime, and the "social safety net" will be shredded far beyond what minimal adjustments are being discussed.

[Steevo]

MT has it right. The government is spending way too much, it's unsustainable. It's not just Obama, but he failed to make the tough choices that are necessary now. Bush ran up spending before him to incredible levels.

Sure, that was in the middle east. Sure, that 9/11 thing. That's the reason.

But a straight medicare entitlement for drug coverage? We can't afford that. Anyone who needed that could have gotten into an medicare advantage plan like my dad, he had drug coverage through that before medicare part D. But his health plan sure put all their subscribers into the government plan- it was ultimately a handout to those health plans. For profit companies.

And that's not nearly all that we can't afford. There's more.

The idea that the poor will have to eat dog food without handouts is ridiculous. That's not gonna happen. But there have been so many handouts. No wonder we're broke.

[Phil]

Nobody is talking about "gutting" the social safety net. Does the government need to adjust it? Probably. More importantly, someone needs to scale back the insatiable government appetite for spending. Check the statistics on the growth of six figure government employees. Look at the statistics comparing public compensation to private compensation. Opting to reduce the size of government and government spending isn't just to protect the wealthy, it's to protect all of us. The US is STILL a country of unparalleled economic opportunity, but if the government continues to suck up all the available capital, that opportunity won't last.

[AMC]

Objectively speaking, doesn't the fact that we are being taxed at the lowest rate in 50 years have to be figured into the equation?

The "out of control spending" argument always seems to ignore that fact....

http://www.usatoday.com/money/perfi/taxes/2009-11-25-oecd25_ST_N.htm

http://www.usatoday.com/money/perfi/taxes/2011-05-05-tax-cut-record-low_n.htm

http://www.businessinsider.com/history-of-tax-rates

http://mbd.scout.com/mb.aspx?s=149&f=2016&t=7665273

[Abigail Field]

Hi Professor

I'm sorry I'm just seeing your post now. I completely agree with you. Perhaps you would appreciate my version. I called it Tax the Corporate Chiefs. http://abigailcfield.com/?p=31

Thanks for what you do.