Admitting Our Limitations

Everything in this world is limited: physical strength, lifespan, money and credit. Even if you are a billionaire, your wealth is finite. Even if you are the United States government, your ability to spend and borrow is limited. This limit may be expressed in the form of a “debt ceiling.” And even if this ceiling has been raised dozens of times during the past 93 years, this elasticity itself is finite.

The U.S. federal debt ceiling was first established in September 1917 as the result of a World War I bond issue which involved borrowings of $11.5 billion, equal to approximately $200 billion in 2011 dollars. During the first half of the twentieth century war was the leading cause of high deficits and a higher debt ceiling. Besides war, the Great Depression was the next leading cause.

During the Great Depression the debt ceiling was raised to nearly 100 percent of GDP (similar to where we are today), though actual federal indebtedness did not go much above 40 percent of GDP. It was during World War II that the United States raised the debt ceiling to a figure above 130 percent of GDP, while actual indebtedness exceeded 120 percent. This was the highest relative debt level of the last 100 years. During the 1950s, 60s and 70s, economic growth led to an overall decline in the debt ceiling if measured as a percentage of GDP. Measured in dollars (not adjusted for inflation), this amounted to a tripling of the debt (and debt ceiling) between 1950 and 1980, and a quadrupling between 1980 and 1992. In early 2001 the federal debt was around $6 trillion which has now, a decade later, increased to over $14 trillion.

Since 1980 the debt ceiling has been raised 39 times and has already been raised three times during Obama’s presidential term. As a matter of routine, Congress has been called upon to raise the debt ceiling again. Given the economic crisis, and the rapid rate at which federal debt has been piling up, there is a growing reluctance to raise the debt ceiling without some reciprocal promise of budgetary restraint. The details of an agreement to this end are being worked out. At the rate of current spending, even if the debt ceiling is raised by the requested $2.5 trillion, Congress will have to raise it again in 2013. If Congress refuses to raise the debt ceiling, the U.S. government will not have enough money to operate all its departments.

The Federal Times posted an article on this question titled Debt ceiling talks: What failure would mean for you. With the caveat that “nobody knows,” The Times suggested that some federal agencies could be shut down (in part or in full), federal employees might not receive paychecks. Pensions and social security payments might be suspended. Defense contractors might not receive payment for services rendered.

In California, where the state has suffered an ongoing budget crisis, state employees were forced to take days off without pay. Furloughs of this type could be attempted at the federal level. Creative cost-saving measures would be a priority, while grants and non-essential programs would fall by the wayside. There could, as well, be an inflationary solution – which would have a serious impact on prices and investments (while wages would largely remain flat).

In coming to grips with the debt crisis, we might ask why federal debt has piled up so quickly in recent years. Of course, the financial crash of 2008 led to the American Recovery and Reinvestment Act of 2009 – an $884 billion economic stimulus package. Add to this the cost of U.S. military and nation-building efforts in Iraq and Afghanistan. Yet, when we visit the Web site Costofwar.com we see that the total cost of the wars since 2001 amount to little more than $1.2 trillion. Obviously, if the federal debt has increased by more than 8.3 trillion since 2001, military expenditure represents a small fraction of the total increase.

One may ask why there should be resistance to raising the debt ceiling at the present time. Why has this become an urgent issue now? A Gallup poll taken this month shows that 42 percent of Americans oppose raising the debt ceiling while 22 percent are in favor. These numbers help us to understand popular attitudes toward government spending and debt reduction. People are worried about the debt and its meaning for their economic future (and the future of their children).

This brings us to an important question: Is the federal debt so large that the economy cannot carry the burden? After World War II federal indebtedness was relatively much higher than today; even so, America was able to grow out of its debt because the free market was allowed to function. In his History of England, Thomas Babington Macaulay showed this to be a longstanding pattern by which economic growth helped Britain to avoid bankruptcy.

Yet there is a destructive side to ever-rising government debt. Austrian economist Ludwig von Mises once explained that government debt “is a … disturbing element in the structure of a market society.” By introducing a distorting presence, it casts a shadow upon the market. “The financial history of the last century shows a steady increase in the amount of public indebtedness,” Mises wrote in Human Action (p. 227). “It is obvious that sooner or later all these debts will be liquidated in some way or other, but certainly not by payment of interest and principal….”

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jrnyquist [at] aol [dot] com ()
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