By Jagadeesh Gokhale
President Obama’s description of what it means to not increase the debt limit is disingenuous. Here’s what he said at his October 8 press conference: “…raising the debt ceiling is a lousy name… it does not increase our debt. It does not grow our deficit, it does not allow for a single dime of increased spending. All it does is (to) allow the Treasury Department to pay for what Congress has already spent.”
Not only is his rhetoric misleading, it reveals how really deep the debt hole is, and how massively difficult the task of climbing out of it will be.
The gridlock on raising the debt limit is but a symptom of deeper divisions in the nation. Those divisions stem largely from long-standing misdirection by public officials on the size of the nation’s indebtedness, arising primarily from entitlement programs that have massive financial imbalances built into them. Those are not part the $16.7 trillion debt already on the books. But they are precisely the ones that President Obama now wishes to unambiguously include in “our debt.” If we used that reasoning, the debt limit has already been breached.
Under the president’s definition, “our debt” must include future unfunded federal payment obligations including Social Security and health care benefits that are expected to grow especially rapidly. But none of the President’s budget agencies—the Congressional Budget Office, the Office of Management and Budget, the General Accountability Office, etc., are willing to measure and transparently report the size of the projected revenue shortfall that the President has now clearly stated is a part of “our debt.”
What we do know is including promised, but unfunded, entitlement payments in “our debt” make it a very large number.
Unfortunately, based on historical precedent, the political deadlock on entitlement reforms is unlikely to be resolved anytime soon. Indeed, there are procedural hurdles involved: In the Senate, for instance, any bills seeking changes to Social Security’s provisions fall under the so-called Byrd rule, which means they can be challenged as inadmissible by a single Senator.
But regardless of how hard it is, it must be done. Because each time we increase the debt limit, we allow more of the future entitlement debt– one could also call it implicit debt — to be converted to explicit debt.
Historically, an increase in the statutory limit on explicit debt has been paired with fiscal reforms. This is par for the course “budget restructuring” that any creditor would insist upon before making a ‘bridge loan” to a failing business. It’s what the IMF, ECB and the European Commission have insisted upon before approving financial aid packages for Greece, Portugal, Spain, and other EU nations—that would otherwise suffer financial ruin and chaos.
Could the Greeks demand financial aid from without undertaking any commitments to change their budget and accounting policies? The answer is no for the Greeks and it should be no for the federal government too.
The president has stated that he would sit down and put everything on the table if Republicans work with him to unconditionally fund the government and increase the debt limit. The Republicans appear ready to take the President at his word and provide a short-term increase in the debt limit. But they should be wary of setting up another commission for deciding on long-term reforms. Recall, when his own Simpson-Bowles commission made debt reduction proposals that garnered 11 supporting votes out of 18 commission members and was lauded by observers from across the political spectrum, Obama froze it out of consideration.
This critique of the President’s words does not imply a pass to Republicans—who in the past have also baulked at reforming entitlement programs. Indeed, past Republican administrations and Congresses worsened the fiscal outlook by driving through multiple tax cuts and expanding Medicare without bearing the political cost of explicitly funding the expansion.
Some economists have already declared the U.S. to be bankrupt: It is seems impossible to fund entitlement promises embedded in today’s fiscal laws and increasingly difficult to contemplate reducing entitlement expenditures to the extent necessary to resolve “our debt.” We need a fail-save mechanism for agreeing, within a limited time frame, to meaningful debt reduction measures. That alone is likely to stimulate economic growth and employment.
Agreement by Republicans to increase the debt limit for anything more than a couple of months would hand Democrats a reason to procrastinate. It would be like inviting debtors to be choosers. That’s unlikely to reveal the proper path out of “our debt” troubles.
Jagadeesh Gokhale is a senior fellow at the Cato Institute. He holds a Ph.D. in economics from Boston University and is a member of the Social Security Advisory Board.