The Debt Ceiling is a 2+2=4 Issue

The great economist Dr. Arthur Laffer is fond of reminding audiences that the laws of economics are no different at the national level than at the household level. Sort of like what we wrote here, on “Restoring Common Household Wisdom”.

We could use a little common household wisdom on the supposedly mysterious and ominous question of whether to raise the federal government’s debt ceiling. We are of course told by whatever administration is in power that raising the debt limit is absolutely necessary to the financial credibility of the United States; that the failure to raise the debt ceiling will cause certain default in the financial obligations of the US; that world economic chaos and calamity will surely follow. What a crock.

In the first place, why is there such a thing as a debt limit? If the failure to increase it is always financial calamity, then why ever have a limit? Do you suppose it is because borrowing above a certain level is irresponsible in relation to the ability to pay it back?

To keep it simple, stay in the household realm. You have a mortgage and a few credit cards; and your income is sufficient to keep all your payment obligations current. But you decide you want to buy more clothes, paint the house, re-landscape the yard, and go over to your bank and ask for a larger line of credit—i.e., you ask to raise your borrowing limit, or your ‘debt ceiling’. They say no.

Do you default on your mortgage and credit cards? No. But you may have to cancel your plans to buy more clothes, paint the house and re-landscape the yard. In other words, you need to cut your planned expenditures. The debt ceiling imposed by the bank was your reminder not to live beyond your means. Later on, if your income goes up because you get a raise, you might be able to get an increase in your debt ceiling. But not until then. To repeat, you have to prove you can live within your means consistently and increase your income before your debt ceiling will be increased.

2+2=4

Now, it’s true that the clothes seller, the house painter, and the landscaper won’t be happy that you cancelled your plans, so they will have to go sell their products and services to other households who have managed their budgets better and have the ability to pay. But you have to get your household budget in order before you will have the opportunity to go forward with your new spending plans.

Wisdom at the US government level is no different. But the problem is that the government doesn’t have a bank to tell it ‘NO’ on increasing the debt ceiling; it has a feckless Congress that so far can be rolled on the issue of raising the debt ceiling. And the Democrat voices in that Congress think more debt never matters because unlike you the individual, the government can always simply vote itself a raise in income—just by increasing taxes. But this where the whole charade falls apart.

You can get a raise by earning it; by working well and productively—in other words, by demonstrating your responsibility and accountability and proving your worth. The government doesn’t earn or create anything; it’s just a central clearing house for taking money from some and giving it to others. And at some point, there is no more money to take from the some. Which leaves the government with one other choice for paying its increased debt—to simply print money. And printing money when there is no real sense of it being earned is the essence of devaluing a currency.

An emphatic NO is the right answer to proposals to increase the federal government debt ceiling. It is absolutely untrue that default on existing debt will be a necessary consequence—just as it is untrue that you will default on your existing debt obligations if the bank says no to your request to increase your debt limit. But if the government is living beyond its means, then, like you, it may have to cut some planned expenditures. That’s not default on an existing obligation; that’s just stopping the government from making new promises that can’t be kept.

So tell your Congressman: cut government spending NOW, and do not increase the debt ceiling. And tell the whole ruling class to stop with the fear-mongering on systemic default. Abide by household wisdom, and get the nation’s fiscal house in order—starting with the spending side.

Paul Gable

April 20, 2011