Some lawmakers argue not to raise the debt ceiling under any circumstances, others advocate for an increase without meaningful change. The best course lies in the middle, but where?
Unfortunately, it has taken a debt “crisis” for leaders in Washington to pay attention. In 2008, it was then-Senator Barack Obama who railed against increasing the debt ceiling as a “failure of leadership.” Say what? Obama, along with Senator Harry Reid, voted against raising the debt ceiling in 2008, but now they want us to raise it by a record $2.4 trillion. Ultimately, both parties are to blame. They saw the problem coming but continued to kick the can down the road.
Firstly, do we need to raise the debt ceiling? Unfortunately, yes. From August 3 to 31, the federal government will receive $172 billion in revenues, but it is set to spend $306 billion. The revenues are sufficient to cover interest charges on the debt ($29 billion), Social Security benefits ($49 billion), Medicaid and Medicare ($50 billion), active duty military pay, Department of Defense vendors, IRS refunds, and about a quarter of the unemployment checks due. However, there would be no benefits for federal employee retirees, national parks, the CIA, the FBI, and many other necessary government functions.
What should be included in a “grand bargain?" Clearly, the best solution to this problem is compromise. But given the current state of the economy, raising income tax rates seems unlikely. Alice Rivlin said Sunday on ABC’s This Week, “I know what they should come up with [a grand bargain] we need to restrain entitlements, we need to cut other spending, defense and domestic, and we need to reform the tax system in a way that will generate some revenues.” Rivlin, an economist at the Brookings Institute, served on Obama’s Debt Commission, was a founding director of the Congressional Budget Office.
The U.S. tax system is in desperate need of reform. Corporate tax rates are among the highest in the world; however, due to loopholes and tax credits, the tax fails to bring in anything close to 35% of corporate profits. The Debt Commission recommended closing tax loopholes and lowering top rates to create additional revenues. Members of both parties have showed support for the idea including former President Bill Clinton and House Majority Leader Eric Cantor.
It is time to face a tough reality. Spending money the country doesn’t have and borrowing it from other countries is simply unsustainable. We must make drastic spending cuts (both domestic and defense) and reform entitlements. According to projections by the CBO, spending on entitlement programs is expected to increase from roughly 10% of GDP today to 15% in 25 years. Entitlements must be tackled today (for those under age 55) to preserve them for future generations.
The debt ceiling, national debt, and budget deficit make an enormous impact on the country’s economy and our ability to respond to unexpected (fiscal, military, or economic) challenges in the future. Since 2008, the national debt as a percentage of GDP has gone from 40% to 70% by the end of this year according to CBO estimates. As daunting as that seems, it does not stop. According to the most likely scenario, the CBO projects the national debt will be 101% of GDP by 2021 and an unbelievable 190% in 2035.
At these spending levels, the debt will continue to stunt economic growth and force lawmakers to make tough decisions about which programs can be sustained. Rivlin, again, put it best in her appearance on This Week, “[The debt crisis] will impede growth if we don’t solve it. The worst thing we can do for growth is not to solve the problem of our looming deficit.” The debt ceiling debate gives lawmakers an opportunity to start.