The Smart Money: Did someone say debt ceiling?

Posted Monday, February 17, 2014 in Analysis

The Smart Money: Did someone say debt ceiling?

by Gina Hamilton

Just before winter break for Congress, in the teeth of a snowstorm that would once again paralyze the Potomac, the House and the Senate Republican leadership quietly caved on raising the debt ceiling and slipped away home before Reagan National Airport closed.

Compare and contrast that behavior to the fun and games last fall, when the government was shut down for sixteen days, in a last-ditch, bedraggled attempt to kill the Affordable Care Act, which began enrolling on October 1.  Congress failed to enact legislation appropriating funds for 2014, or a continuing resolution.  

National parks, museums, and monuments were closed at one of the busiest times of the year - leaf peeping season and Indian summer.  Eight hundred thousand federal employees were indefinitely furloughed and there was no guarantee they’d ever be paid for the involuntary “vacation”.  Another 1.3 million were considered essential, and ordered to work without pay.

The GOP’s efforts to scuttle the ACA were so extreme that nobody noticed for quite a long time that the websites weren’t working as advertised or that the number of enrollees were pitifully low.

In the end, the GOP didn’t succeed. Their approval ratings plummeted, and most of the leadership were making resolutions that this would not happen again in February, when appropriations nudged up against the debt ceiling again.

And thus, when it did, Mitch McConnell in the Senate and John Boehner in the House did what others had refused to do.  They ignored the majority of their caucuses and voted with the Democrats to keep the government functioning.  In the Senate, McConnell voted with 12 Republicans and all Democrats to kill a filibuster attempt by Sen. Ted Cruz of Texas.  After the cloture vote, the bill passed, 55-43 on strict party lines. In the House, Boehner called the vote for a clean debt ceiling increase with only 28 Republicans voting in favor.  It passed 221-201.

Tea Party Republicans and outside conservative interests groups were sharply critical of both votes, and have promised election-year reprisals. McConnell is facing a tea party challenge in his district, and if he survives that, he’ll face a strong Democratic opponent.

And Boehner has lost support from leadership in his own party.  Paul Ryan of Wisconsin and Cathy McMorris Rodgers of Washington both voted against the bill.

But what about the debt? Who is responsible for it? And what can be done? Like anything else, it’s a combination of things.

Forecasting, tax cuts, and spending

At the end of Bill Clinton’s presidency, the Congressional Budget Office forecasted that the debt would dip by $3.3 trillion by 2011 if the economic policies that were put into place were continued.  Whether that might have happened or not is a moot point; it didn’t happen. George W. Bush issued a tax cut without finding a way to pay for it in 2001, then 9/11 happened.  He entered into wars in Afghanistan, and later, Iraq, also without accounting for them in the budgets.  He issued a second tax cut in 2003.  And then created a large public program - Medicare Part D - without accounting for it by increased payroll taxes.

So the $3.3 trillion decrease forecasted was incorrect.  But things might have worked out anyway - maybe not quite as rosily - if the recession of 2001 and then the Great Recession of 2008 hadn’t happened.

When the bottom fell out of the economy in 2008, federal tax receipts dropped like a stone. From a high of about $2.6 trillion in tax receipts (already about $0.4 trillion less than spending), tax receipts dropped to about $2.1 trillion at the worst part of the recession, at the very time that spending had to increase to keep the economy from crashing utterly.  There was a small stimulus of $800 billion.  It wasn’t enough.

Unemployment stabilization costs rose, payroll taxes were cut. Spending rose to $3.6 trillion, and is falling now, as tax receipts are making a rebound.

The debt, without the economic downturn and attempts to deal with it, and without the wars in Afghanistan or Iraq or the Bush tax cuts of 2001 and 2003, would be about a quarter of the debt we face today. Half of all public debt can be tied to the wars in Afghanistan and Iraq, and the tax cuts.  Another quarter comes from the economic downturn and recovery attempts. The remainder - some $4.25 trillion, or 25 percent of our GDP - is what our debt would be today if only the first decade of the century had never happened.

Of course, we can’t just go back and erase those years.  But there are some things we can reverse, if there is the political will to do it.

Undoing the damage

True political will would start by repealing the Bush era tax cuts, which mostly favored the wealthy, and the Obama tax act of 2010, which favored the lower 95 percent.  These tax cuts have been a major driver of the deficit, and since the debt is nothing more than accumulated deficits, a major driver of the increasing national debt.  The Bush cuts were supposed to sunset in 2010, but as part of a deal to reauthorize unemployment and provide tax relief to working people, the majority of the tax cuts were allowed to remain in place for everyone making less than $400,000 per year.  Cutting these taxes would return $3.5 trillion over the next 10 years.

Returning other taxes to Clinton-era levels - such as the estate tax and investment taxes, ending loopholes in the tax structure, and decreasing mortgage deductions for second homes or high income households, would also save billions every year. Adding a surtax on incomes over a million dollars would add nearly $50 billion by next year.

Adding carbon taxes for electricity plants and a bank tax for those at risk due to size would add almost $200 billion that could cut down the debt.  And removing the cap on payroll taxes would add $100 billion per year, which could be used to support Medicare and Social Security for the next 75 years, long after the baby boom passes.

Spending will have to be tackled, too. There will be a peace dividend as we finally pull out of Afghanistan, and we should celebrate by killing some extremely expensive military programs that have not worked well, such as the F-35 fighter jet. The program is billions over budget and seven years behind schedule, and doesn’t meet FAA standards.  So far, we’ve spent $400 billion on the program, and the cost could climb to $1.5 trillion before a single jet is ready for combat.

Several other military programs could also be slashed, and a decrease in the size of a standing military, could bring the debt down by at least $2 trillion over ten years. Cutting 250,000 government contractors would save $17 billion alone.

Forcing corporations like pharmaceutical firms that do business with the government - and with the Affordable Care Act, that’s everyone now - to cut prices or lose contracts would save an estimated trillion dollars a year. Without touching Social Security or Medicare, education, welfare, or any other safety net program, it is possible to add taxes and cut spending enough to pay down the debt.

Will we ever have a Congress that will do it?

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