While this pervasive fiscal issue has been debated by legislators since late last year, the fracas officially began on May 16 when America collectively slammed its head into the debt ceiling of $14.3 trillion. Treasury Secretary Timothy Geithner heeded the warning by pushing the debt default date to August 2. This buffer—the debt issuance suspension period—allows for some time to address both short-term and long-term issues.
Geithner’s stance is that if the nation reaches the debt ceiling, it would force the government to default some of its existing obligations, resulting in a “catastrophic economic impact.” Politicians on both sides of the aisle have mixed feelings on how best to proceed. Some hold to the stance that the ceiling shouldn’t be raised without significant spending cuts while others feel that not raising the debt ceiling is tantamount to playing chicken with a runaway freight train.
At stake is the nation’s ability to meet its financial obligations, including paying for programs such as Social Security and Medicare. Not unlike the average American with a mortgage, a car loan and credit card balances, the nation has bills to pay. When funds run dry, defaults occur.
“The closer we get to the debt ceiling, the more fierce the debate over whether to raise the limit,” said Valerie Coleman Morris, former CNN Business Anchor and author of Mind Over Money Matters—It’s Your Money So Take It Personally. Morris explains that if the debt ceiling is not raised, the government could shut down, non-essential federal workers could be sent home and world governments’ confidence in the U.S. may be shaken. Still, a recent Gallup survey found that 47 percent of Americans want their member of Congress to vote against a debt ceiling increase.
Raising the debt ceiling is far from unprecedented. It’s been done 74 times since March of 1962, and 11 of those hikes occurred in last 15 years. But according to some, there’s much more at stake this time around.
“The level of our debt as a percentage of GDP is now markedly higher than it’s ever been since World War II. More critically, the trend is unsustainable because of going-forward commitments Congress has made to Medicare, Social Security and other programs,” said David Teece, chairman and CEO of the Berkeley Research Group and director of the Institute of Management, Innovation and Organization at the Haas School of Business, University of California, Berkeley.
“There is no way our economy can fulfill these promises. We need to agree now to revise our promises, at least in a going-forward basis. If we don’t cut now, we will be in deep crisis,” Teece continued. “Moreover, just because excessive levels of government spending and debt have been allowed to continue to hold doesn’t mean we should fail to take corrective action now. Rather, excessive expenditures in the past make it all the more imperative we cut now.”
When President Barack Obama was a junior senator for Ill. in 2006, he, along with all Democrats, voted against raising the debt ceiling when the Bush administration was faced with a similar dilemma. He has since conceded that vote was a mistake. With the 2012 presidential campaign gearing up, cutting federal programs is not favored by Democrats; many want the ceiling raised. Obama, who has met with GOP leaders on the issue, has requested a statutory debt ceiling increase from $14.294 trillion to $16.7 trillion.
“I would anticipate that they will increase it again, and if they do, it obviously becomes more of a political football,” said Andrew Reina, managing director of Ajilon Finance Solutions, who has experience in public and private financial management, accounting, operations and business improvement.
“There is a lot of uncertainty and concern right now. The longer [politicians] push this back, the more of a negative impact there will be on job creation,” Reina continued. “We are in for a bit of a rocky road whether they increase the debt ceiling or not. At the end of the day, it is not sustainable what we are doing.” Further complicating matters was a warning from the Moody Corporation that it would consider cutting the nation’s credit rating by mid-July if significant progress wasn’t realized. The company provides credit ratings and research covering debt instruments and securities.
Raising Taxes is not the only Answer
In a bipartisan effort to cut spending while also increasing the debt ceiling, Vice President Joe Biden has assembled a seven-member group comprised of senior members of the Senate and House of Representatives. Republicans have drawn a line in the sand and will not vote to raise the debt ceiling until significant cuts are made. These include possible cuts in farm subsidies, requiring federal workers to contribute more money to their pension plans, caps in annual spending, selling excess federal property, reducing Medicare fraud and overpayments and auctioning broadcast spectrum licenses. These cuts, and others being discussed, amount to approximately $150 billion—but Republicans are calling for “trillions” to be loped off the budget.
“The failure to take corrective action now will negatively impact everyone. There is unquestionably political maneuvering,” said Teece. “Republicans want to appear parsimonious; Democrats appeal to established constituencies of beneficiaries by suggesting that the deficit can be handled in the first instance by higher taxes. However, higher taxes alone won’t solve the problem.”
For those politicians looking to kick the proverbial can down the road, analysts say this historical short-term-fix approach will make matters worse in the long run. “Today’s baby boomer generation is the first generation of Americans to ever put themselves ahead of their children. Today’s politicians, and the voters they represent, will have a lot to answer for in the history books if they continue to pursue intergenerational greed by saddling the next generation with this generation’s debt,” said Teece.
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