Monday, July 11, 2011

The Debt Limit - what's really going on

Currently the government borrows $0.40 out of every dollar it spends. The total amount that the Treasury is allowed to borrow is the debt limit and is set by Congress. Typically when the Treasury gets close to the debt limit, Congress raises it. Sometimes there are some speeches about how the government needs to get its house in order and stop borrowing. Senator Barrack Obama gave one of those speaches in 2006. The limit was raised anyway.

Why are things different now? There are three parties involved, each with their own agenda.

First are the Congressional Republicans. They came to office with an ambitious agenda but they only control the House. This is their big club to force the Senate and the White House to compromise. They have taken a lot of criticism from the left about being too radical but many of them are following the wishes of their electorate. The ones in swing districts worry that they will lose if they agree to a deal that includes tax increases.

Next are the Congressional Democrats. Some of them are ideologically motivated. They believe that the rich are not paying enough taxes and will not agree to any deal that does not include tax increases. The rest of the Democrats are trying to discredit the Republicans by including tax increases. That is why meaningless increases like depreciation on corporate jets have entered the conversation. When talking about the trillions of deficit over the next decade, $3 billion is not even a rounding error but it keeps coming up.

So far the Democrats are winning the public relations battle but they are not fighting fair. It is easy to gain public support when your polls are disingenuous. For example, Medicare as it currently exists cannot continue. There is not enough money. But, rather than present two ways of reforming it, they phrase the choice as being between the Ryan plan and the current system. The rich do not make enough money to solve the deficit but they ask if people would favor tax increases on someone else (the "rich") over cutting programs.

The final party in the debt negotiations is the newest - President Obama. The states are high for him. As things stand now, he has no accomplishments to run on for reelection. Unemployment it likely to be 8% or higher. He is not going to win in Afghanistan. The best he can hope for there is to have a no more troops stationed there than when he took office. Obamacare continues to be controversial and may be declared unconstitutional by the election. Regardless, most of it will not even go into effect until after the election.

That is why Obama is pressing for a Grand Plan that will include $4 trillion in deficit reduction and changes to Social Security and Medicare to keep them solvent. If he can accomplish that with Republican assistance, then he has a shot at reelection.

And that is why the stakes are so high. Each side is fighting for political advantage.

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