Keynesians everywhere issued a collective gasp on May 16, 2011 as the United States government hit its debt limit.
In a letter to Congress, Treasury Secretary Geithner said that the government would have to stop funding some obligations because it could no longer borrow money.
Addressed to “The Honorable Harry Reid” with copies to Speaker of the House John Boehner, House Minority Leader Nancy Pelosi and Senate Minority Leader Mitch McConnell, Geithner’s letter said:
“I am writing to notify you, as required under 5 U.S.C. § 8348(l)(2), of my determination that, by reason of the statutory debt limit, I will be unable to invest fully the portion of the Civil Service Retirement and Disability Fund (“CSRDF”) not immediately required to pay beneficiaries. For purposes of this statute, I have determined that a “debt issuance suspension period” will begin today, May 16, 2011, and last until August 2, 2011, when the Department of the Treasury projects that the borrowing authority of the United States will be exhausted. During this “debt issuance suspension period,” the Treasury Department will suspend additional investments of amounts credited to, and redeem a portion of the investments held by, the CSRDF, as authorized by law.”
In addition, Geithner notified Congress that he would similarly “be unable to invest fully the Government Securities Investment Fund (“G Fund”) of the Federal Employees’ Retirement System in interest-bearing securities of the United States, beginning today, May 16, 2011.”
Being unable to borrow to fund deficit spending, if it continues, will put a halt to Keynesian interventions in the economy. Under Keynesian doctrine, shortfalls in aggregate demand in the economy as a whole, leading to unemployment, can be made up by creating demand via government spending programs. As the basis for much federal intervention over the years and recently, Keynesian economics has led to the budget crunch presently experienced by Washington.
This, however, has not stopped dedicated Keynesians from grumbling that more spending is still needed. The White House, for instance, “says a default would tip the U.S. back into a financial crisis,” The Wall Street Journal reported.
Three days earlier, liberal economist Paul Krugman also warned that the country needed federal spending, or else.
“The direct effects of hitting the ceiling would be bad enough — sharp cutbacks in spending, which would undermine essential services, not to mention derail the economy,” he wrote.
Cooler heads, however, have pointed out that financial reform is desperately needed and that hitting the debt ceiling offers a chance to fix Washington’s perpetual fiscal problems.
Appearing on CNN’s “State of the Union” program on May 15, Republican Senator Mitch McConnell said “This is actually a great opportunity to address this burgeoning problem,” according to Politico.
Explaining what it would take to get him to vote in favor of an increase to the debt ceiling, McConnell said:
We need to do something about the short term. We need to get a spending ceiling for the next two years because we’re not likely to get a final budget out of a Democratic Senate and a Republican House. We need to know how much we’re going to spend the next two years, and that needs to be on a declining basis. Then we need to do something mid-term, that is within what we call the budget window, within the next few years, both on the discretionary side and the mandatory side. And the mandatory side means entitlements. And we also need to do something long-term. I just mentioned we have over $50 trillion in unfunded liabilities. The President doesn’t seem to want to do Social Security without a tax increase which is clearly not needed and we just heard from the trustees Friday that both Medicare and Social Security are in serious trouble and it’s worse than anybody thought. Maybe the President’s open to doing something on the Medicare side. But to get my vote … we need to do something significant, short-term, medium-term and long-term.”
Proponents of government spending are right, nonetheless, when they predict significant consequences from a failure to raise the debt ceiling. A study [PDF Download] by the Congressional Research Service (CRS) pointed out some of the consequences:
- Having to make payments with funds from revenue only, “the federal government implicitly would be required to use some sort of decision-making rule about whether to pay obligations in the order they are received, or, alternatively, to prioritize which obligations to pay, while other obligations would go into an unpaid queue. In other words, the federal government’s inability to borrow or use other means of financing implies that payment of some or all bills or obligations would be delayed,” CRS says.
- A “backlog of unpaid bills would continue to grow until the government collects more revenues or other sources of cash than its outlays. In some cases, delaying federal payments incurs interest penalties under some statutes such as the Prompt Payment Act, which directs the government to pay interest penalties to contractors if it does not pay them by the required payment date….”
- If Treasury delays investing a federal trust fund’s revenues in government securities, or redeems prematurely a federal trust fund’s holdings of government securities, the result would be a loss of interest to the affected trust fund. This could potentially worsen the financial situation of the affected trust fund(s) and accelerate insolvency dates” for programs like Social Security.
It is important to note, however, that reaching the debt ceiling is not the same thing as a government shut down. As CRS noted, “Failing to raise the debt ceiling would not bring the government to a screeching halt the way that not passing appropriations bills would. Employees would not be sent home, and checks would continue to be issued. If the Treasury was low on cash, however, there could be delays in honoring checks and disruptions in the normal flow of government services.”
Apocalyptic prognostications from some big government analysts to the contrary, life will go on even if the government must end its deficit spending and live within its means.
“Americans understand we simply can’t keep spending money we don’t have,” said House Speaker John Boehner in a statement in response to news that the debt ceiling had been reached. “Spending-driven deficits, record debt, and the threat of tax hikes are smothering our economy with uncertainty and making it harder for small businesses to hire new workers. As I have said numerous times, there will be no debt limit increase without serious budget reforms and significant spending cuts – cuts that are greater than any increase in the debt limit.”
The Moral Liberal associate editor, Dennis Behreandt, is the Founder and Editor In Chief of the American Daily Herald, and former long-time contributor, serving both as Senior and Managing Editor, to The New American magazine, writing hundreds of articles on subjects ranging from natural theology to history and from science and technology to philosophy. Mr. Behreandt’s research interests include the period of late antiquity in European history as well as Medieval and Renaissance history.