Public Confusion: The Debt Ceiling

With the August 2nd deadline just 18 days away, I awoke to yet more disappointing news regarding the impasse of a debt ceiling resolution. I personally cannot imagine how anyone would use the well being of our national economy as a bargaining chip. As an article in The Economist put it, our politicians are not even in agreement that hitting the debt ceiling would be catastrophic, let alone in agreement over how to raise it. All this despite testimony from Federal Reserve Chairman Bernanke stating that even a technical government default would be calamitous.

Perhaps even more striking is a recent Gallup Poll revealing that less than one quarter of Americans actually favor raising the debt ceiling. I can only hope these numbers reveal a lack of understanding regarding the terms "debt ceiling" and "technical default", rather than a genuine desire to force our government to decide between paying our soldiers or our doctors, not to mention the tail risk in the bond market. So, for the sake of clarity for all five of my readers, let us discuss the definitions and implications of these terms:

The debt ceiling is the result of a rather quirky law that caps the amount of money the government can borrow to cover expenses. We, as in the government, spends much more than we take in via taxes, so we borrow money to cover the difference. One must remember that we are the only "first world" country in the world that has a debt ceiling at all, but we are one of many that operates on a continuing budget defecate.

Perhaps the confusion regarding the debt ceiling is a misconception that raising the debt ceiling somehow authorizes new spending programs. This is not the case. The debate on where money goes is the business of Appropriations Committees. The raising the debt ceiling would do little more than allow the government to cover its current bills, such as Social Security and the salaries of public workers.

The term "technical default" is also a common source of confusion. Many Americans seem to believe that America, if a debt ceiling agreement is not reached in time, can simply pay off its bond debt obligations with money cut from entitlement programs that would be cut. While the likelihood of the Treasury Department putting foreign banks in line ahead of Medicare beneficiaries is questionable at best, the simple fact that we are in financial trouble at all would constitute a technical default; the primary ramification of which would be a hike in rates demanded by bond holders for acquiring the added risk of holding paper of a country in trouble. Therefore the total debt of the government to bond holders would actually be higher under a debt ceiling impasse than there would be otherwise.

So despite widespread panic and confusion, the numbers (the only real facts in this debate) indicate the need for an increase in the debt ceiling. The long overdue discussion regarding spending, taxes, and entitlement programs is better suited for the campaign trail and the budget committees.