And so the Debt-Ceiling Opera Enters the Last Act

blr-editor | July 19, 2011 | Comments (0)

He's hoping to avert disaster this week

As we earlier reported, the complex dance to raise the U.S. debt ceiling is proceeding according to plan. Only the nimble of step are invited to participate. Yes, there will be a debt ceiling agreement. And yes, it will most likely be the too-clever-by-half plan offered by Senator Mitch McConnell or a close variation.

To recap, Senator McConnell – the Republican Senate Leader, proposed legislation to allow the President to raise the debt ceiling, an act that would be challenged by Republicans in Congress but vetoed by the President.

This will have – in Senator McConnell’s mind – the effect of assigning blame to the Democrats for the nation’s spiraling debt. All well and good. Other than the fact that all major polls have Americans mostly blaming Republicans for the debt impasse.

Politics is politics, but the encouraging thing to take away from this whole episode is that regardless of rhetoric, politicians are mature enough – on both sides – not to take the United States over the brink.

The realization has set in – other than with Presidential candidate Michelle Bachmann and most Tea Party House freshmen, that a U.S. credit default will be punished very severely by the stock markets and the credit agencies.

The world will demand higher interest rates for U.S. debt and seek other currencies to park their trading surpluses and sovereign wealth funds. Not to mention of course, another recession that will certainly come. It seems Economics 101 may be triumphing at last.

Post Agreement, What Then?
After agreement is reached, what are the next steps? Well, sad to say, a raised debt ceiling is only the beginning of trying to solve the nation’s problems. Two further things must happen: cuts in spending – all spending – and tax increases.

It is the latter that makes Republicans apoplectic. Objectively, the Republican position is unreasonable unless they are able to say what ideal level taxes should be dropped to and why?

The mantra is just “lower taxes” from the right, but U.S. personal and corporate taxes are already among the lowest among developed countries.

If lower taxes are always good then zero taxes would be best – that is the logical extension of the Republican argument. If zero taxes make no sense, what is the perfect level of taxes, 5%, 10%, 11%… and why?

The “lower taxes” mantra is infuriating to many economists because of how irrational it is. It is a learned behavior with little analytic understanding of the position by its proponents. We lowered taxes and lost several trillion dollars from the very rich and corporations. That, with the wars in Iraq and Afghanistan are the major reasons for new oceans of red ink.

Why not just lower taxes to 1% and expect a surplus from the “consequent growth in the U.S. economy”? Of course it wouldn’t work, the country would be supine within 6 months. If its not 1%, what is it? Republican leaders won’t say, but whatever level of taxes we have and attendant deficits, the Republican cry is always “lower!!” That position makes no sense.

On the Democratic side, there is also blame to spread about. Entitlements and everything else must be cut and there cannot be sacred cows. For Social Security the retirement age for benefits should be raised as people live longer, its salary cap for workers should rise; Medicare should be means tested as should Medicaid; Defense must be cut (hopefully starting with military bases in Western Europe); and pork excised from the budget.

Anyhow, back to the debt ceiling ruckus. By the end of this week, after symbolic Republican legislation to “cut, cap and balance” fails to clear the Senate, agreement will be reached on raising the debt ceiling. Then discussion will begin on cuts totaling $1.5 to $4 trillion and perhaps on letting Bush tax cuts for the rich expire and closing corporate tax loopholes.

Perhaps one good consequence of this whole episode will be to educate Americans both politically and economically. I do not see other positive from this, but I’ll take that silver lining.