This appeared in the Knoxville News-Sentinel March 6, 2011
Congress Must Mind Debt Ceiling
We have been witnesses to our government behaving badly.
First, there has been the threat of a government "shutdown" that is not really a shutdown. Then there is the haggling over this year's budget with $4 billion in spending cuts for two weeks and a $61 billion cut for the rest of the fiscal year.
Even my students who struggle with math can figure that with a federal budget of $3.8 trillion, our Congress is debating rounding errors. We all grow tired of hearing that seemingly all government spending is somehow essential. Then comes the report from the Government Accountability Office that the federal government is replete with duplicative programs (as if we didn't know this already) wasting at least $200 billion.
At a minimum, members of Congress should propose eliminating all duplicative programs. Then the real job should begin. I think that a modest proposal should be to not raise the debt ceiling. Currently the ceiling is set at $14.294 trillion and government spending has pushed the debt to only around $150 billion less than the cap.
Estimates are that government borrowing will hit the ceiling around April 15 - the irony of it all. What Congress always has done in the past is to raise the ceiling and has done so at least 77 times just so it can keep spending. The "ceiling" was intended to limit government spending by limiting the amount it could borrow.
Allowing the ceiling to rise is fiscal irresponsibility. Of course, there are those who always want to spend more and who forecast doom and gloom. Two of the administration's spokesmen, Treasury Secretary Timothy Geithner and chief economist Austan Goolsbee, have warned that a failure to raise the ceiling would precipitate an economic crisis with catastrophic effects on the economy. However, I have found few statements by either that are trustworthy.
No crisis would occur. The United States would not default on its obligations. April 15 reminds us that the government still will be receiving monies that can be used to pay on the existing debt. U.S. Sen. Pat Toomey, R-Pa., recognizes this and has introduced legislation to that effect. What not raising the ceiling actually means is that the Treasury could no longer borrow additional funds to cover expenditures appropriated by Congress.
Unlike American households who have a budget constraint, despite the debt ceiling Congress does not.
Congress was aware of the ceiling when it appropriated the expenditures in the first place and knew it would broach the limit. Yet it did it anyway knowing that the ceiling is symbolic and not real. Well, it is time we made it real. We have to get our fiscal house in order and the first step is letting the debt ceiling be the budget constraint for Congress. Just say no.
Dr. Harold Black is the James F. Smith Jr. Professor of Finance at the University of Tennessee. He may be reached at hblack@utk.edu.
© 2011, Knoxville News Sentinel Co.
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About Me
- H.A. Black
- Harold A. Black is professor emeritus in the Department of Finance, University of Tennessee, Knoxville having retired after 24 years of service. He has served on the faculties of American University, Howard University, the University of North Carolina - Chapel Hill and the University of Florida. His government service includes the Office of the Comptroller of the Currency and as a Board Member of the National Credit Union Administration. He also has served on the boards of directors Home Savings of America and its parent company, H. F. Ahmanson & Co., Irwindale, California prior to its merger with Washington Mutual Savings Bank, on the board of New Century Financial Corporation, Irvine, California, then the nation’s largest real estate investment trust and as director and later chairman of the Nashville Branch of the Federal Reserve Bank of Atlanta. He writes an occasional article for the Knoxville News-Sentinel at http://www.knoxnews.com/staff/dr-harold-black/. His web page is haroldablackphd.com
1 comment:
This is an interesting read and the exact opposite view from Secretary of the Treasury Timothy Geithner. After reading his letter to the senate it sends a message of severe doom and gloom on our nation. From what I understand in your post is that with the debt ceiling reached, the Treasury will still be able to meet its past obligations but won't be able to fund for new future obligations enacted by Congress. That point is left out by Mr. Geithner. The core of your article deals with the redundancy and elimination of many government and federal agencies, which are not profit maximizing and if were a business would fail miserably (EPA, Dept of Education). We have personally talked about this a few times in your office hours and I agree with the overburden of agencies as well.
The sad thing is that the looming debt ceiling crisis will be pushed up as it always has been in the past. As you were saying, what is its importance if we lack discipline to enforce it? We really need to be aggressive and enact rules to follow a sound and responsible fiscal budget. The government shutdown issue was "solved" this Friday at the last minute and I believe the debt ceiling will be the same. This weekend was quite hilarious with all my military buddies freaking out over the "shutdown" and not getting paid. The government shutdown in 95 and 96 lasted roughly 5 and 21 days respectively and stopped all non essential government services. The military has been and will always be an essential service so we will get paid no matter what, however it may just be delayed. As it turned out they agreed by cutting $38 Billion from the current fiscal spending this year... So with a deficit of 1.4 Trillion this year, thats roughly 3.8 billion a day, as a result we saved 10 days worth of work. Big deal, thats less than 3%, but at least it is a start.
In Mr. Geithner's letter to the senate he even mentions that "Changing the debt ceiling does not alter or increase the obligations we have as a nation, it simply permits the Treasury to fund these obligations that Congress already established". So by not raising the debt ceiling it will also have no impact altering or increasing the obligations with the same logic and as a result we need to cut the non essential, mandated, redundant, and subsidized programs which do nothing but add to the deficit.
But lets be realistic, will that really happen?
A quote I really like by Treasury of the Secretary Henry Paulson is, "I don't want to sound heartless, but in almost every one of our businesses, there are 15 to 20 percent of the people who really add 80 percent of the value. I think we can cut a fair amount and not get into muscle and still be very well-positioned for the upturn."
P.S. I really need to create a Google account so I don't have to be anonymous all the time.
-Michael Knapp
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