The battle over raising the federal debt limit is pretty confusing to most Americans -- and it doesn't help matters that the Obama administration is twisting the facts in a bid to get the public on its side against congressional budget-cutters.
Treasury Secretary Tim Geithner, in particular, is playing the "dire warning" game. Back in April, he wrote Congress: "If the debt limit is not increased by May 16," Treasury will have to take "extraordinary measures . . . to temporarily postpone the date the United States would other wise default on its obligations."
Well, here we are on May 17, with no sign that the sky has fallen. As his deadline approached last week, Geithner issued a new doomsday alert for Aug. 2, and took the rhetoric up a notch: "Default . . . would have a catastrophic economic impact . . . [including] sharply higher interest rates . . . declining home values and . . . [and an even worse] financial crisis." At risk are "military salaries, Social Security and Medicare payments, interest on debt, unemployment benefits and tax refunds . . . "
But he also hedged: Catastrophe would only result from a default in US "legal obligations" and affected payments wouldn't necessarily be stopped, they might just be "limited or delayed."
The real issue is that Team Obama wants Congress to raise the limit on how much the federal government can borrow -- now set at $14.29 trillion -- without any strings. House Republicans and some senators in both parties want to pair any such increase with substantial spending cuts.
Here's a rundown of the myths and facts: Myth: America will "default" if the debt ceiling isn't raised. Truth: Treasury can still roll over debt as its bills and bonds come due -- and easily cover the interest out of its monthly receipts. It simply can't engage in new borrowing because that would raise the total amount of debt beyond the statutory limit. Myth: The government will "shut down" if the debt ceiling is not raised. Truth: The feds simply won't be able to spend in excess of what they take in. So they'll have to prioritize outlays -- a gov ernment cutback, not shutdown. They can delay paying some bills, or even furlough some nonessential federal employees.
The latter seems only fair -- as you may recall, US public-sector payrolls swelled by 500,000 during the Great Recession, even as the private sector suffered nearly 8 million in job losses.
(As time marches on, it's true the feds wouldn't be able to fully spend the agreed upon budget, but all that means is that the feds -- like the taxpayers -- would have to live within their means, at least for a while.) Myth: Aug. 2 is a hard date. Truth: The "extraordinary measures" Geithner can take, including not issuing more IOUs to Social Security and Medicare and state and local governments, will push the date out even further -- and that's just when Treasury needs to start its belt tightening. Indeed, Treasury has taken such measures time and again in past battles over raising the debt limit. Myth: Not raising the debt ceiling will send shock waves through the debt markets, bringing a downgrading of Uncle Sam's credit rating and sending federal borrowing costs through the roof. Truth: The debt markets fear the debt (and debt limit) going up, not the reverse. When credit rater Standard and Poor's recently lowered its "outlook" on US debt from "stable" to "negative," it did so based on its prediction that "in two years" US debt, now 99 percent of GDP, would hit 105 percent of GDP. Investors fear a lack of major spending cuts not a failure to raise the debt limit. Myth: The United States will "default" on its "commitments to seniors" if the debt ceiling isn't raised. Truth: Social Security checks and Medicare reimbursements will still go out unless the Obama administration decides to withhold them. Yes, both programs are headed for bankruptcy, so benefits must come down eventually -- but that's a dif ferent fight. No one's pushing major reform of either program as part of the debt-limit battle. Myth: It would be grossly irresponsible to "close the gap" without raising taxes "on millionaires and billionaires." Truth: According to the IRS, all income for people earning (as joint filers) more than $200,000 comes to less than $1.9 trillion. The Bush tax cuts run 4.6 percent at the highest bracket. That amounts to $87 billion for all joint returns over $200,000 -- barely a 20th of the Obama-era deficit levels. Even if the feds took every penny of that income, it wouldn't cover the gap.
Geithner's right; we're headed for financial Armageddon. He just got three things wrong: the cause, the cure and the timing. The US fiscal supernova will come in a couple of years from too much debt, so spending what we take in and no more -- starting now -- would be pretty good medicine. That's precisely what not raising the debt ceiling would ensure.
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