Friday, June 03, 2011

Why the debt ceiling fight is healthy for our government

Charles Krauthammer explains why the debt ceiling debate is salutary for our government. The government doesn't have to default; there is money to pay interest on the debt. But that means that we will have to make choices about the rest of the budget.
There is no drop-dead date. There is no overnight default. Debt service amounts to about 6 percent of the federal budget and only about 10 percent of federal revenue. This means that for every $1 of interest payments, there is roughly $9 of revenue the government spends elsewhere.

Move money around — and you’ve covered the debt service. Cover the debt service — and there is no default. What scares Geithner is not that we won’t be able to pay our creditors but that his Treasury won’t be able to continue spending the obscene amounts of money (about $120 billion a month) it doesn’t have and will (temporarily) be unable to borrow.

Good. The government will (temporarily) be forced to establish priorities. A salutary exercise.
This fight is a preview of the real crisis that will come in the ever-nearer future when the whole house of cards that is our federal spending pattern comes tumbling down.
The current debt-ceiling showdown, therefore, is an instructive dry run of an actual Greek-like default, which awaits if we don’t solve our debt problem.

With one difference, of course. During today’s debt-ceiling fight, if the markets start to get jittery, interest rates on U.S. debt spike and the economy begins to teeter, the whole exercise can be called off with a push of a button — an act of Congress hiking the debt ceiling. When the real crisis comes, however, there is no button. There is no flight-simulator reset. We default, and the economy really does crash.

Which is why the current debt-ceiling showdown is to be welcomed. It creates leverage to force fiscal sanity.
I'd endorse Krauthammer's recommendation that the House demand spending caps that can only be overridden by a super-majority vote. Then maintain Boehner's proposal of dollar-for-dollar cuts for every dollar raising the debt ceiling. That is tough, but getting us on the road to fiscal sanity was never going to be easy. If it were easy, we'd already be there.