Congress Increases Debt Ceiling, Spends Almost Half of It

The last week of the 108th Congress was a lame-duck exercise in fiscal irresponsibility. The legislators voted to raise the national debt ceiling by $800 billion (which incidentally is larger than the entire national debt run up from 1776 to 1980, when Ronald Regan instituted the Republican policy of borrow and spend). This is the third time since Mr. Bush took office that the ceiling has been raised, to the tune of $2 trillion (or if one prefers, $2,000,000,000,000). This was followed by an omnibus spending bill, larded with pork, that ran to almost $400 billion. This is an opportune moment to reflect on where this path leads.

As Herb Stein, an economic adviser to Richard Nixon and father of the very clever start of TV, film and political policy circles Ben Stein, said, “If something can't go on forever, it won't.” Right now, the US government is spending more than it takes in, and in order to balance the economic equations, money has to flow into the US Treasury from outside the country in the form of debt. Eventually, the foreign investors will decide they want no more dollar-denominated assets, and this will be accelerated by the declining value of the dollar relative to other currencies. In order to keep them interested in such assets, returns will have to rise, which means higher interest rates.

Higher interest rates will decrease economic growth by making capital more costly. Moreover, the Federal Reserve loses its ability to affect the economy by altering interest rates – its room for maneuver is reduced. In a time of terror worries, the Fed must have, in reserve, the power to run an accommodative monetary policy. At the same time, the US government should be able to run a complementary fiscal policy, but having run an economy on the basis of such a fiscal policy for almost four years, the deficit will have to really soar to make an appreciable difference.

If this happens, small business will discover that it cannot borrow money to grow. Small business is the engine of employment in the US, and if that engine sputters, the feeble progress made in the last year to improve employment will be undone. It would not be unreasonable to see unemployment running closer to 8-10%. There can be no greater threat to America's middle class than strangling small business and doubling unemployment.

What can be done? Politically, the price of a fix is too high for this president and congress to pay. High taxes and lower spending are the only way out. The current budget deficit shortfall is estimated by the Congressional Budget Office to be $415 billion (plus the cost of the war in Iraq). That is how much taxes and spending must change. At very least, restoring the responsibility of “pay-as-you-go” changes in taxes and spending needs to happen. Congress just rejected that in the latest omnibus spending bill. It may be a long four years.


© Copyright 2004 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.


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