Debt Ceiling Fight Club

September 27, 2012

The debt ceiling debate continues to provide ample fodder for the Obama campaign about the irresponsibility of Republicans and their role in the ratings downgrade for U.S. bonds. However, despite popular belief, Republican lawmakers are not at fault, says Veronique de Rugy, a senior research fellow at the Mercatus Center.

  • Standard & Poor (S&P) threatened to downgrade the U.S. rating if it didn't reduce the debt by $4 trillion, agree to a credible plan within three months, and guarantee the promise of the newfound fiscal discipline.
  • However, the Budget Control Act of 2011 raised the debt ceiling by $2.1 trillion.
  • Furthermore, the debt reduction package only committed $900 billion in cuts and another $1.2 trillion in deficit reductions.
  • Even if all the cuts were implemented, government spending would grow from $3.6 trillion in 2012 to $5.2 trillion in 2020 with a 10 percent increase in military spending.
  • Additionally, the Budget Control Act did nothing to make Medicare, Medicaid, or Social Security sustainable.

The ratings downgrade came from Washington's unwillingness to come together to create a true package that included serious reductions and long-term sustainability. Lawmakers on both sides of the aisle were unwilling to make serious cuts to many of the entitlement programs.

Treasury Secretary Timothy Geithner argues that the long, drawn out debates need to be avoided in the future to prevent pain and suffering to the economy. However, the impacts that were thought to be associated with the debt ceiling debate did not materialize.

  • Interest rates continued to stay low.
  • This is proof that investors never feared the government would default on the debt.

However, it is important to realize the haste with which the government needs to act in response to mounting debt. Tough spending cuts need to be made. Many people see the country's low interest rate as a sign that the economy is doing well. However, the Federal Reserve is keeping those rates low to boost the economy. Moreover, other countries are in worse fiscal shape than the United States, which makes the economy look better than it is.

Source: Veronique de Rugy, "Debt Ceiling Fight Club," Reason Magazine, October 2012.

 

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