American politicians agree: Borrow more. Just don’t raise the borrowing limit


Why is the US economy so determined to ignore the fiscal cliff?

Today’s job’s numbers, while filled with the subtle weaknesses that indicate an economy still on the road to recovery, outstripped expectations. Housing construction and prices are growing, as is consumer confidence and business activity in the services sector. Markets remain blithe in the face of Washington’s political theater, confident of a deal.

Not all is rosy, of course: Business investment is down, which analysts are blaming on the fiscal cliff (we had better hope so), and industrial production shrank last month, according to one index, although another says it expanded. But this isn’t an economy on the brink of recession; it’s an economy that hasn’t reached full capacity yet.

Except that it is—as everyone knows, the fiscal cliff could lead us into a Greek-style austerity recession. But it’s important to understand that the United States does not face a fiscal crisis, and the fiscal cliff is not really about debt reduction. There’s no near-term problem financing government debt. There’s no medium-term problem financing government debt. There’s a lot of debt, yes, driven by long-term health care spending and a disinterest in financing it, but not much evidence it’s hurting private investment, thanks to the Federal Reserve.

The fiscal cliff, after all, is a very effective debt reduction policy: If Congress did nothing at all, the US would immediately be on a path to lower debt. So why is every single debt reduction advocate, from the constellation of organizations funded by private equity banker Pete Peterson to Congress’ leading deficit hawks, against the fiscal cliff? Charitably, they all understand that the economic costs of debt reduction (immediate recession) outweigh the benefits (a more sustainable budget decades from now). There are also suggestions that preaching deficit reduction is a good way to argue for the economic policy of your choice: lower taxes or more spending on social programs.

The real goal of the fiscal cliff talks is figuring out how increase the debt, to clean up the mess created by 2011′s political showdown over the America’s debt limit. The US, unlike most countries, has separate processes for setting tax and spending policy and for issuing enough debt to make up for the shortfall. Congress sets the ceiling for issuing debt; while it usually raises the limit when necessitated by deficit spending, the ceiling occasionally becomes a tool for fiscal brinksmanship between Congress and the president. If the legislature won’t raise the limit, the eventual result would be a catastrophic default of US debt. (There may be creative ways to avoid such a result, my favorite being the Platinum Coin strategy.)

In 2011, Speaker of the House John Boehner threatened a default on US debt unless his budget demands were met—though the Republican budget, as well as President Obama’s, required increasing the debt limit. The ensuing legislative morass resulted in a set of spending cuts alongside tough caps on future spending and the creation of the fiscal cliff, a legislative time bomb to force through even more austerity if Congress and the president didn’t agree on a different fiscal course.

That brings us to today: Obama and Boehner are negotiating an increase in the federal debt, with their parties in agreement that maintaining middle income tax cuts is a good way to do it. The dispute is how much the US should be borrowing to finance tax cuts for the wealthy (a lot, say Republicans) versus how much the US should be borrowing to finance health care for the elderly (a lot, say Democrats). In the background, there is the question of how much the US should be borrowing to finance its bloated defense budget, also set to be slashed.

The big wrinkle now is that even though both parties are agreed on the need to borrow more money, that pesky debt ceiling is set to be reached once again.

“We have the potential for a much scarier showdown on the debt limit, with potentially much larger damage to the economy, than from the fiscal cliff,” says Robert Greenstein, who directs the Center on Budget and Policy Priorities.

Democrats are insisting that the debt limit increase be included in the deal to avert the fiscal cliff, since both parties agree on the need to increase the debt. Republicans suggest once again they are willing to default, hoping to gain the upper hand in negotiations that have significantly favored Obama since the election.

The scary thing is that going over the fiscal cliff, while likely to rattle markets, shouldn’t result in serious economic damage if a deal is reached is the weeks after to undo its effects. But a potential default on US debt would be very ugly, indeed, and much harder to recover from. How ironic if an economy that’s financially secure were to default thanks to a botched attempt at sustainability.


View Comments (1)

Recommended for You

  • Tycoon buys 30 Rolls-Royces for Macau hotel

    A Hong Kong tycoon has placed the biggest ever order for Rolls-Royce cars, agreeing to buy 30 Phantoms to chauffeur guests at a luxury resort he's building in the global gambling capital of Macau. Stephen Hung's $20 million purchase surpasses the 14 Phantoms bought by Hong Kong's Peninsula Hotel in…

    Associated Press
  • Master's Degree in Nursing

    CCNE accredited MS in nursing in as few as 18 months online. Learn more today!

    AdChoicesNorwich UniversitySponsored
  • Tycoon's arrest sends shock wave through Russia

    Tycoon's arrest sends shock wave through Russia MOSCOW (AP) — The arrest of a Russian telecoms and oil tycoon has sent shock waves through the country's business community, with some fearing a return to the dark days of a decade ago, when the Kremlin asserted its power by imprisoning the country's…

    Associated Press
  • Before You Buy Alibaba, Check Out 4 Top China Stocks

    Before You Buy Alibaba, Check Out 4 Top China Stocks While investors gear up for Alibaba Group 's (BABA) hotly anticipated initial public offering, don't forget about other Chinese stocks that are worth keeping an eye on. Today's Young Guns Screen of

    Investor's Business Daily
  • As Fed takes baby steps, Cramer's trick for profit

    In turn, Cramer says making money in the market, involves looking at the environment through the lens of the Fed. "The trick is to remember that they speak for the common person," Cramer said. "The Fed wants the common person to make money." With that backdrop always in mind, Cramer says it becomes…

  • "The Retiree Next Door": How successful retirees stretch their savings

    "The Retiree Next Door": How successful retirees stretch their savingsBy the time she hit her late 40s, Toni Eugenia wasn’t sure she would ever be able to retire. Eugenia, 56, a pharmacy technician who lived in Houston, was nearly $200,000 in debt and

    Yahoo Finance
  • Costco Stores in Canada to Stop Taking American Express

    “The credit card relationship between American Express and Costco Wholesale Canada will not be renewed when it expires” on Dec. 31, the company said today in an e-mail to Canadian customers. The message was attributed to Lorelle Gilpin, vice president of marketing and membership for Costco…

  • Beanie Babies creator's sentence debated in court

    Beanie Babies creator's sentence debated in court CHICAGO (AP) — Federal prosecutors seeking to put the billionaire creator of Beanie Babies in prison for hiding millions in Swiss bank accounts told appellate court judges Wednesday that the toymaker's sentence of probation threatens to erode the…

    Associated Press
  • Norwich Information Security MS

    Online, accredited, top ranked. NSA Center of Academic Excellence. Recognized by the Department of Homeland Security. Download your free brochure!

    AdChoicesNorwich UniversitySponsored
  • Apple to unveil new iPads, operating system on Oct. 21 : report

    The company plans to unveil the sixth generation of its iPad and the third edition of the iPad mini, as well as its operating system OS X Yosemite, which has undergone a complete visual overhaul, the Internet news website said. Trudy Muller, a spokeswoman for Apple, declined to comment. The iPad is…

  • Play

    Citi, Bank of America Offer Discounted Mortgages

    Citigroup and Bank of America will offer mortgages at discounted interest rates to help borrowers with low incomes or subprime credit. AnnaMaria Andriotis joins MoneyBeat. Photo: Getty.

    WSJ Live
  • Gilead Stock Is Falling On These Drug Setbacks

    Gilead Stock Is Falling On These Drug Setbacks Gilead Sciences (GILD) shares are backsliding Wednesday on news that the patient drop-out rate for hepatitis C drug Sovaldi is quadruple that of clinical trials. In addition, the biotech's Phase 2 study results

    Investor's Business Daily
  • Don't care about Alibaba? Here's why it may matter

    When the Alibaba Group Holding prices its initial public offering Thursday, small businesses in particular will be watching. Founder Jack Ma -the former English-teacher-turned-dot-com billionaire-has touted his e-commerce platform as a way for smaller merchants to expand their international…

  • Here's What Mark Cuban Wishes He Knew About Money In His 20s

    Cuban is the owner of the Dallas Mavericks basketball team. Billionaire investor and entrepreneur Mark Cuban is generous with his advice. When we asked him what he wishes he'd known about money in his 20s, he said:

    Business Insider
  • Play

    Tues., Sept. 16: Watch Humana Stock

    Humana, Global X Social Media Index ETF and Majesco Entertainment are among stocks to watch. WSJ's Chris Dieterich discusses the details with Michael Casey. Photo: Humana

    WSJ Live
  • Wondering How You Could Save on Home Insurance?

    Get a quote from Farmers Insurance and discover how you could save. Speak with an agent to get the knowledge you need to make an informed decision.

    AdChoicesFarmers InsuranceSponsored
  • CNBC Anchor Calls Out Fed-Hater Bill Fleckenstein In Startling Shouting Match

    CNBC Bill Fleckenstein of Fleckenstein Capital appeared on CNBC's Futures Now program on Tuesday. Futures Now host Jackie DeAngelis came out swinging, asking Fleckenstein right at the top if he was willing to admit that he had misunderstood monetary policy. Sounding taken aback, Fleckenstein…

    Business Insider
  • Margaritaville casino owners seek bankruptcy

    The owner of Biloxi's Margaritaville casino has filed for Chapter 11 bankruptcy protection Tuesday, only hours before a hearing where the landlord aimed to seize the property. The filing by MVB Holding LLC in U.S. Don Dornan, a lawyer for landlord Clay Point LLC, said the company had planned to ask…

    Associated Press
  • Embraer to sell 50 E-175 jets to Republic in $2.1 billion deal

    Brazil's Embraer SA, the world's third largest commercial planemaker, said on Wednesday it booked a firm order from U.S. The deal, which will be included in Embraer's order book for the third quarter, is valued at $2.1 billion, the planemaker said in a securities filing. The planes will be operated…

  • Don't buy Alibaba stock: 'Dean of Valuation'

    Investors should steer clear of Alibaba , valuation expert Aswath Damodaran said Wednesday. On CNBC's " Fast Money ," Damodaran, a professor of finance at New York University's Stern School of Business, noted that he was looking at Alibaba stock from the perspective of a long-term investor, not a…

  • SHOE COMPANY: Our CEO Just Disappeared And Most Of The Money Is Gone

    "and like that: he's gone." This is an actual headline from a company press release: "CEO and COO disappeared, most of the company's cash missing." (Via FastFT) In a statement, German-based shoe company Ultrasonic said its CFO,  Chi Kwong Clifford Chan, has been unable to reach the company's CEO,…

    Business Insider
  • Top Analyst Upgrades and Downgrades: AEP, BHP, GE, Incyte, 3M, Tyco, Under Armour and More

    Top Analyst Upgrades and Downgrades: AEP, BHP, GE, Incyte, 3M, Tyco, Under Armour and More Stocks were firm on Wednesday morning ahead of the FOMC meeting outcome. Tuesday’s rally may have sparked higher interest again, and investors are looking for bargains

    24/7 Wall St.
  • Take Your Career in Law to the Next Level!

    Earn an accredited Master of Laws in only 1 year. 100% online, No LSAT required, and 5 concentrations offered, including Taxation Law. Apply today!

    AdChoicesThomas Jefferson Law Sponsored
  • Billionaire Investor Says Chinese People Work Harder And Western Companies Could Face Deep Trouble After Alibaba IPO

    Michael Moritz, the chairman of VC firm Sequoia Capital, is a huge fan of Chinese internet companies and reiterated his enthusiasm for the Chinese market in an interview with The Wall Street Journal Wednesday. The billionaire investor described the Alibaba IPO as a “major landmark event” that is as…

    Business Insider