[Cautionary note to innumerate readers, this post will require some facility in basic arithmetic and an attention span.]
El Lider Fearless has issued his latest executive demand – no more congressional limits on accruing national debt. "We are not a deadbeat nation," Mr. Obama said. "And the consequences of us (sic) not paying our bills...would be disastrous." The dirty little secret that his constituents can’t grasp is that Obama’s fundamental transformation is taking us directly into that very same disaster, big time. His offer to “accept responsibility for raising the debt limit if Congress voted to give him the authority” is meaningless pabulum. What possible ‘responsibility’ could he accept in the matter of running up more debt, after having already added over $5T with impunity, and then being re-elected by his ‘stash’ shouting supporters.
We will first dispose of the notion of defaulting on our debt service payments under the current debt limit of approximately $16.4T. Then looking at the White House 2013 federal budget put out by its OMB, we see that projected total federal outlays are about $3.8T, with projected total tax receipts coming in at about $2.9T. This leaves a deficit of $900B which must be borrowed. When some other wiggle items are added to the amount to be borrowed, the real deficit rises to $1.2T and the national debt will then increase to about $17.5T. (See Table S-15 in the Summary Tables)
To service the debt at today’s very low interest rates will cost ‘only’ $250B in 2013 (Table S-5). (When interest rates become real again, debt service costs will approach $1T; more later.) I hope readers are beginning to appreciate that the debt service-to-GDP or debt service-to-budget are the real metrics which no one wants to make available and publish. As I’ve pointed out many times before, the ever popular debt-to-GDP is a meaningless metric in guiding both fiscal and monetary policies, and that’s why interest rates are supremely important.
So where are we with all this ‘default on our debt’ nonsense? Our tax receipts are $2.9T and we have to pay our lenders $250B or about 8.6% of our receipts. Therefore, there is no need to stiff our lenders unless we purposely want to create a financial crisis. Even without raising the debt limit by one cent, we are not at risk of ruining our standing in the credit markets.
Now cue the leftwing chorus to belt out another verse of ‘Let’s raise them taxes one mo’ time’. But even some three-digit progressives are beginning to understand that we’re on the back side of the (gasp!) Laffer Curve, and that raising tax rates will further hobble the economy and lower tax receipts. So where are we?
1. There will be no chance of even approaching a balanced budget, let alone debt reduction, without first reducing the $2.3T mandatory spending component. That the $1.26T discretionary component has to be reduced, should go without saying.
2. There is no possibility that we will default on our debt service payments. We have the money, and the Constitution requires we pay our debts.
3. The ONLY thing that will give hope to Americans, our creditors, and trading partners worldwide is the robust growth of our economy. That will generate the tax revenues to sustain sensible spending programs and debt service payments.
4. To robustly grow our economy we need to 1) totally revise our tax code, 2) totally revise our tort laws driving litigiousness, 3) massively roll back our regulatory jungle, 4) extricate government from mangling markets, and 5) remove the influence of government service employee unions.
All the rest of what we’ll be hearing from Washington in the coming weeks is self-defeating bullcrap.