As President Barack Obama and key lawmakers work on a deal to raise the national government’s debt ceiling, some prominent economists, public policy experts, and political activists have been arguing it’s more important to bring down spending and debt.
Some of them scoff at the notion the government will default if Congress does not raise the debt ceiling. The government technically hit the ceiling on May 16, yet Treasury Secretary Timothy Geithner says he can do enough financial finagling to avoid default until early August.
“Not once in the past 65 years has the monthly interest due on debt exceeded monthly Treasury revenues. As long as the Treasury Secretary manages cash correctly, the U.S. will not default on its obligations to its creditors,” said Brian S. Wesbury, a Heartland Institute policy adviser and former chief economist to the Joint Economic Committee of Congress who was once named by The Wall Street Journal as the best U.S. economic forecaster.
‘Markets Can Comprehend’
“Global financial markets are perfectly able to comprehend the nuances of this debate,” Wesbury said. “If the debt limit is used as a tool by some politicians to force serious, significant, and durable corrections to the long-term budget deficit, the markets would react in a very positive manner. Servicing the debt and paying for the operations of government are not equivalent. As long as the debt is serviced, cutting spending, laying off workers, or slowing down payment for budgeted items is not the equivalent of default.”
Daniel J. Mitchell, a senior fellow at the Cato Institute and a former economist of the U.S. Senate Finance Committee, said at a Tea Party press conference in May: “Notwithstanding demagoguery from Treasury Secretary Geithner and Fed Chairman [Ben] Bernanke, the United States does not default if the debt limit remains at $14.3 trillion.
“The federal government will be collecting, on average, nearly $200 billion of tax revenue each month, and interest payments on the debt average less than $20 billion per month, so there is easily enough money to service existing debt. The only exception to that statement is that default is possible if the Treasury Secretary makes a deliberate and highly political decision to not pay bondholders. That won’t happen. Fiscal conservatives should hold firm in their demands for real reform in exchange for a debt limit increase.”
These views challenge much of the establishment thinking coming from Wall Street, Congress, and the White House. Republican leaders are pushing the Obama administration for a deal to raise the debt ceiling in exchange for major spending cuts.
These views challenging the conventional thinking apparently line up with the thinking of famed investor and former George Soros fund manager Stanley Druckenmiller.
‘Will Wonder If House Is in Order’
“People aren’t going to wonder whether 20 years ago we delayed an interest payment for six days. They’re going to wonder whether we got our house in order,” Druckenmiller told James Freeman of The Wall Street Journal for a May 14-15 Weekend Interview column.
Druckenmiller told Freeman he would prefer a short-term problem servicing the nation’s debt if it brings a long-term solution to the nation’s soaring borrowing and spending.
“Here are your two options: piece of paper number one—let’s just call it a 10-year Treasury,” Druckenmiller said. “So I own this piece of paper. I get an income stream obviously over 10 years, . . . and one of my interest payments is going to be delayed, I don’t know, six days, eight days, 15 days, but I know I’m going to get it. . . . But in exchange for that, let’s suppose I know I’m going to get massive cuts in entitlements and the government is going to get their house in order so my payments seven, eight, nine, 10 years out are much more assured.”
A second scenario, said Druckenmiller, would be one in which the debt ceiling is raised to avoid any disruption in payments, and increased borrowing and spending continue.
“I don’t have to wait six, eight, or 10 days for one of my many payments over 10 years. I get it on time. But we’re going to continue to pile up trillions of dollars of debt and I may have a Greek situation on my hands in six or seven years. Now as an owner, which piece of paper do I want to own? To me it’s a no-brainer. It’s piece of paper number one.”
Tea Party Hunts RINOs
Leaders of the Tea Party, which backed Republicans who took control of the House of Representatives in the 2010 general election, are pressuring Republicans to stand against raising the debt ceiling. They accuse House Speaker John Boehner (R-OH) and other Republican leaders of being RINOs—Republicans in Name Only.
“Boehner and his Republicans are fiddling while Rome burns,” said William Temple, chairman of the Tea Party National Convention. “The $38 billion in 2011 cuts they claimed [to avoid a government shutdown in April] were actually just $20 billion—about five days worth of U.S. borrowing! Washington is piling 40 cents per dollar of federal spending, $4 billion per day, on to the national debt and our children’s backs, yet these wimpy House RINOSs refuse to hide President Obama’s Mastercard!”
“This is a throwdown issue; this is the Alamo for us,” said Temple of the Tea Party’s stand against raising the debt ceiling. “We don’t want to see the government continue this wasteful spending. The Tea Party is going to hold every RINO accountable. This issue alone is going to determine if they have somebody running against them in their next primary.”
Steve Stanek ([email protected]) is a research fellow at The Heartland Institute and managing editor of Finance, Insurance & Real Estate News.