Wednesday, August 10, 2011

History and Consequences

With all of the information that is available, the public remains confused. It may have to do with the sources of their information, but the latest polling data says that 47% of Americans say their greater concern is that raising the debt limit would lead to higher government spending and make the national debt bigger, while 42% say their greater concern is that not raising the limit would force the government into default and hurt the economy. Additionally, 74% of Republicans and GOP leaning independents who agree with the tea party faction of the party say their bigger concern is that raising the debt limit would result in more spending, compared to 58% of those who do not agree with the faction.

According to the Congressional Research Service, the debt ceiling has been raised 74 times, since March 1962, and 10 of those times have occurred since 2001. Theoretically, the debt ceiling limit is supposed to help Congress control spending. In practice, the debt limit has been ineffective in controlling spending and deficits because politicians and reality remain as strangers to one another. History shows that it has been that way for quite a while.

The fact is that the debt ceiling doesn’t regulate anything, believe it or not. The Budget Control Act of 1974 created a process that requires Congress to vote on aggregate levels of spending, revenue and deficits every year. That makes the debt limit redundant.

Five years after the 1974 Budget Act passage, a combination of a failure to increase the debt limit in time and a breakdown of Treasury’s machines for printing checks caused a two-week technical default and a short term failure for the government to meet its obligations. That raised interest rates by six-tenths of a percentage point. Over time that percentage hike translated into billions of dollars in increased interest payments on the nation's debt, which became a cost passed on to taxpayers.

In other words, default increases the debt service which increases the deficit.

President Franklin Delano Roosevelt (FDR) questioned the meaning of a legal debt limit, according to Time Magazine on January 20, 1941. The President “hinted that there should be no legal limit.” In its coverage of the FDR’s Budget for the fiscal year 1941-42, Time noted, “Last July's Democratic platform made no mention of that fiscal dodo, that old museum piece: a balanced budget. Franklin Roosevelt held to precedent—he didn't mention it, either.” The Newark News remarked, “Like the budgets of Mr. Average Citizen, it was full of unjustifiable errors of judgment, of expenses borne out of habit, of big installments still being paid on past mistakes.”

FDR signed the first Social Security Act into law in 1935. Thirty years later, that part of FDR’s “New Deal” became part of the President Lyndon Baines Johnson (LBJ) “Great Society” and established Medicare when LBJ signed the Social Security Act of 1965 into law.

Only half of American's 65 and older had any health insurance at the time. The bill LBJ signed also created Medicaid, the public health insurance program that today covers over 60 million people, including one in three children, eight million people with disabilities and nearly six million low-income seniors. Each state administers its own Medicaid program. Republicans have scorned the entitlement programs of the Great Society ever since, now more so than ever.

Here is how we pay for those programs. Social Security and Medicare entitlements are paid for by the FICA [Federal Insurance Contributions Act] tax. The rate is 7.65% of our pre-deduction [gross] earnings. 6.2% goes for OASDI [Old-Age, Survivors, and Disability Insurance]. 1.45% goes for Medicare. The Social Security system pays for old-age, survivors, and disability. Hospital insurance is funded by Medicare. Income tax funds the government. It is called revenue and is a separate and different issue. Republican rhetoric obfuscates that point.

While the public may be somewhat divided about the debt ceiling, they are not so confused when it comes to entitlements. “The public decisively supports maintaining the status quo,” according to the Pew Research Center. “Six-in-ten (60%) say it is more important to keep Social Security and Medicare benefits as they are; only about half as many (32%) say it is more important to take steps to reduce the budget deficit.”

LBJ argued that helping the poor was in the best interest of business by providing stability to society. GOP disdain for Johnson’s Great Society and its War on Poverty continue. Republicans demand sharp cuts to Medicare and Social Security. Programs for the poor and the aging are the “reckless spending” recitations of Republican rhetoric that compound the deficit conundrum that confronts House Speaker John Boehner.

At a recent press conference Boehner said, “I agree with the president we cannot allow our nation to default on our debt.” He added, “But to prevent a default, a bill must pass the Congress.” For that to happen, “the bill must include spending cuts in excess of the increase in the debt ceiling.” He faced a similar challenge in April with the government shut-down threat. He also faces factional opposition within the Republican House majority and its fame-seekers, like Representatives Cantor and Ryan.

"I don't think the majority of Congress is so stupid as to visit an actual default on the United States," said David Kelly, chief market strategist at JPMorgan Asset Management. "Their constituents would never forgive them for playing fast and loose with the credit-worthiness that it took 230 years to build up." Meanwhile, Standard and Poor's told Reuters last week it would “waste no time cutting the top-notch U.S. credit rating” if Treasury missed a $30 billion debt payment on August 4.

The consequence of default would crank up borrowing costs for consumers and businesses, and flush the vulnerable US economy back into the toilet of recession.

The Speaker of the House is responsible for ensuring that the House passes legislation supported by the majority party, in this case the majority of the majority. Mr. Boehner was a teenager when LBJ ushered in the Great Society in 1965. [President Obama was 4.] Majority leader Eric Cantor (R-VA) was a 2-year-old. GOP Budget author Paul Ryan (R-WI) wasn't even born. . It is their short-sighted ignorance of history and consequences, coupled with the ideological intransigence of the freshman tea party faction, which threatens Boehner’s speakership, the Republican Party and the United States.

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Article first published as History and Consequences on Blogcritics.

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