As we approach another faux money crisis, this time over the debt ceiling, a few thoughts to help people understand what’s going on … and what isn’t going on:
1. Every year, the United States raises X amount of dollars through taxes and other means. At the same time, it places orders for goods and services, ranging from tanks to office supplies to Medicare payments, for Y amount of dollars. If X and Y are equal, the budget is balanced. If X is larger than Y, the budget is in surplus. If Y is larger than X, the budget is in deficit.
2. If the budget is in deficit, the US government has four choices in how to proceed. It can cut its orders (it can buy fewer tanks, office supplies, Medicare payments, etc.). It can raise its taxes to meet its orders. It can borrow money to cover the difference between tax receipts and orders. Or it can do some combination of all four. That’s it.
3. For most of the last 30 years, the budget has been in deficit. For most of that time, the United States has chosen to borrow money to cover the gap between taxes and orders, rather than raising taxes or cutting orders or both.
4. Notably, the United States buys much of what it buys (Y) on what amounts to credit: vendors provide office products and other goods and services to the United States today in return for a US promise to pay for those goods later.
5. The constant borrowing of money year after year after year has left the United States with an accumulated debt of $16+ trillion. Which is a lot of money.
6. Some years ago, in an effort to shame itself into not borrowing money forever and ever amen, Congress passed a law creating something called the “debt ceiling.” This is the maximum amount of money the United States is to be allowed to borrow. The idea was that if the Congress had to explicitly vote to raise the debt ceiling, it would be embarrassed and would choose to cut spending or raise taxes or both in order to bring the United States’ budget into balance.
7. This attempted shaming into good economic behavior has never really worked, regardless of whether Democrats or Republicans are in charge. This is mostly because the programs the US spends its money on are actually pretty popular (for the most part), and so people don’t really want them cut even as they refuse to pay higher taxes to pay for these goods. As a reminder, the United States spends almost 80% of its entire budget on seven (7) things: defense (20%), Social Security (20%), Medicare (13%), Medicaid (7%), “welfare” (12%), retirement benefits for federal workers (5%), and interest on the debt (5%). Everything else—roads, schools, the FAA, the FDA, the National Parks, college loans, everything—comes out of the remainder. Chopping those programs is somewhere between hard and impossible. Rather than raise taxes or cut spending or both, the United States has generally just kept on borrowing and raising the debt ceiling as needed.
8. Recently, Republicans in Congress have decided that the vote to raise the debt ceiling affords them a chance to force the United States to reduce its spending. Essentially, they are refusing to allow the United State to borrow more money (which requires raising the debt ceiling) unless the United States reduces its purchases of goods and services.
9. One problem with this Republican demand is that, per point 4, much of what the United States buys it buys on credit. Accordingly, vendors have already provided various goods and services to the United States and are awaiting payment … payment which will come only if the United States borrows money (and thus necessitates raising the debt ceiling). In other words, the United States has already received the good or service. The question is: will it pay for it? If the US fails to borrow money to pay for goods and services it has already received, no one will provide the US with any goods or services (or loans) on credit … which, given that we borrow 40% of the money we spend these days, means that we’d have to cut 40% of our budget instantly.
10. Another problem with this Republican demand relates to point 7: the programs that would be cut are quite popular, at least for the most part. While everyone imagines someone else’s program will be cut while theirs will be saved, as a practical matter that can’t happen if cutbacks happen in the 40% range.
11. On the other hand, nothing else has worked to force political leaders and all the rest of us to accept that we either have to want less, or pay more taxes, or both.
See? It’s easy. Just square the circle and solve all of America’s budget problems.
Have fun. And if you figure it out, please do let the rest of us know!