Saturday, January 5, 2013

The Difference Between the Debt Ceiling and the Budget

Over the next couple of months two huge battles are going to be waged in Washington: the debt ceiling and a continuing resolution to fund the government. While both are essential, only one has the potential to wreck the economy of the United States.

What's frightening is how ignorant many people are about the differences between the two.  This is what Republican Pennsylvania Senator Pat Toomey had to say regarding the debt ceiling fight on MSNBC's Morning Joe: "We Republicans need to be willing to tolerate a temporary, partial government shutdown." 

Astonishingly, Toomey's sentiment is shared by a good many Republicans who seem to think that a debt-ceiling default would only produce a "temporary" government shutdown. My guess is if you polled the members of Congress, a large percentage, if not majority of them would be unable to distinguish between the debt ceiling and continuing resolution. 

Let's talk about the second one first.  Basically, the government has been funded over the last two years by a series of continuing resolutions. That's because Congress has been unable to come up with an actual budget.  In the event that a CR is not passed, then all government services would stop. No Social Security checks would be sent out, no Medicare or Medicaid payments would be made and all government employees would be furloughed without pay.  This produces what Toomey referred to as a temporary shutdown. 

In the 1990s, there were two such government shutdowns as Bill Clinton and Newt Gingrich butted heads. The shutdowns were relatively brief and, with the exception of the political embarrassment that ensued, basically innocuous.*  Government shutdowns can be nasty, but seldom lead to any consequences of import, save for the inconvenience they bring to those directly affected.

This is NOT the case with the debt ceiling.  In August of 2011, we were precariously close to defaulting on our debt. The ramifications of doing that would've been profound and lasting. That's because the debt ceiling is not about future borrowing, despite what some keep saying; it is about honoring the debt that is on the books. The analogy is like getting a credit card bill in the mail - a bill that is, admittedly, very high - and refusing to pay it. Ask anyone who has ever tried that tact with a bank what the result was and I'm willing to bet the ranch it didn't go well.

Even after going all the way to the brink in 2011, and receiving a credit downgrade from Standard and Poor's as a result, the GOP is once more flirting with disaster.  It is threatening to block any debt ceiling increase unless it gets substantial cuts in spending from the Obama Administration and Congressional Democrats. This is the same "political brinksmanship" that S&P cited in its report 18 months ago.

The danger here is two fold: 1. We would eventually raise the debt ceiling but, owing to the intransigence of Congressional Republicans, get hit with another credit downgrade; or 2. This time we would actually end up defaulting on the debt limit altogether. The former would be bad enough; the latter disastrous.

It is inconceivable that any responsible elected official would endanger the nation's credit rating or, worse, throw it and most of the world's markets into economic chaos to prove a political point. But that appears to be what Republicans are lining up to do. And willingly.

The clock continues to click. Officially we have already hit the nation's debt limit. For the next few weeks, like in 2011, Treasury can move a few things around to continue to honor its debt. But, inevitably, this has to get done.

Sad isn't it? The more things change, the more they stay the same.


Links: http://thehill.com/blogs/blog-briefing-room/news/275155-sen-toomey-calls-for-a-government-shutdown
http://money.cnn.com/2011/08/05/news/economy/downgrade_rumors/index.htm

* In October 1995, the U.S. did come close to its debt limit, but Treasury was able to pull monies from federal retirement accounts to prevent a default.

http://finance.fortune.cnn.com/2011/04/25/what-would-clinton-do/

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