A friend who's been watching the absurd
machinations in Congress asked me "what happens if we don't solve the
budget crisis and we run out of money to pay the nation's bills?"
It was only then I realized how effective Republicans lies have been.
That we're calling it a "budget crisis" and worrying that if we don't
"solve" it we can't pay our nation's bills is testament to how
successful Republicans have been distorting the truth.
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The federal budget deficit has no economic relationship to the debt
limit. Republicans have linked the two, and the Administration has
played along, but they are entirely separate. Republicans are using what
would otherwise be a routine, legally technical vote to raise the debt
limit as a means of holding the nation hostage to their own political
goal of shrinking the size of the federal government.
In economic terms, we will not "run out of money" next week. We're
still the richest nation in the world, and the Federal Reserve has
unlimited capacity to print money.
Nor is there any economic imperative to reach an agreement on how to
fix the budget deficit by Tuesday. It's not even clear the federal
budget needs that much fixing anyway.
Yes, the ratio of the national debt to the total economy is high
relative to what it's been. But it's not nearly as high as it was after
World War II -- when it reached 120 percent of the economy's total
If and when the economy begins to grow faster -- if more Americans get
jobs, and we move toward a full recovery -- the debt/GDP ratio will
fall, as it did in the 1950s, and as it does in every solid recovery.
Revenues will pour into the Treasury, and much of the current "budget
crisis" will be evaporate.
Get it? We're really in a "jobs and growth" crisis -- not a budget crisis.
And the best way to get jobs and growth back is for the federal
government to spend more right now, not less -- for example, by exempting
the first $20,000 of income from payroll taxes this year and next,
recreating a WPA and Civilian Conservation Corps, creating an
infrastructure bank, providing tax incentives for small businesses to
hire, expanding the Earned Income Tax Credit, and so on.
But what happens next week if Congress can't or won't deliver the
President a bill to raise the debt ceiling? Remember: This is all
politics, mixed in with legal technicalities. Economics has nothing to
do with it.
One possibility, therefore, is for the Treasury to keep paying the
nation's bills regardless. It would continue to issue Treasury bills,
which are our nation's IOUs. When those IOUs are cashed at the Federal
Reserve Board, the Fed would do what it has always done: Honor them.
How long could this go on without the debt ceiling being lifted?
That's a legal question. Republicans in Congress could mount a legal
challenge, but no court in its right mind would stop the Fed from
honoring the full faith and credit of the United States.
The wild card is what the three big credit-rating agencies will do.
As long as the Fed keeps honoring the nation's IOUs, America's credit
should be deemed sound. We're not Greece or Portugal, after all. We'll
still be the richest nation in the world, whose currency is the basis
for most business transactions in the world.
Standard & Poor's has warned it will downgrade the nation's debt
from a triple-A to a double-A rating if we don't tend to the long-term
deficit. But, as I've noted, S&P has no business meddling in
American politics -- especially since its own non-feasance was partly
responsible for the current size of the federal debt (had it done its
job the debt and housing bubbles wouldn't have precipitated the terrible
recession, and the federal outlays it required).
As long as we pay our debts on time, our global creditors should be
satisfied. And if they're satisfied, S&P, Moody's, and Fitch should
Repeat after me: The federal deficit is not the nation's biggest
problem. The anemic recovery, huge unemployment, falling wages, and
declining home prices are bigger problems. We don't have a budget
crisis. We have a jobs and growth crisis.