Today, the Debt Ceiling debate is MAD

Fifty years ago, it was called MAD: Mutually Assured Destruction.

By the 1980s, the U.S. and the Soviet Union together had amassed 25,000 nuclear warheads aimed at each other. Carl Sagan, the people’s scientist, compared it to two people standing in a room the size of a football field filled up to their chins with gasoline, each holding 10,000 matches and each threatening to light one.
Today, the Debt Ceiling debate is MAD.

First, what is the Debt Ceiling? Until 1939, Congress approved the issuance of a Treasury bond every time the U.S. needed to borrow money to pay its bills. In 1939, Congress authorized the Treasury Department to borrow the money needed to fund the government, but set a limit on how much it could borrow. That limit is the Debt Ceiling. For the past several decades, the Treasury has been borrowing money four out of every five business days and the Debt Ceiling is approaching $14 trillion. Our lenders, in approximately equal amounts, are the Federal Reserve, U.S. investors and foreign investors (mostly the central banks of China, Japan and the United Kingdom).

Over the years, Congress has raised the Debt Ceiling with no fanfare. For example, the Debt Ceiling was raised during each year of George W. Bush’s Presidency, doubling from $5 to $10 trillion. Every time the Debt Ceiling was changed, a handful of Senators and Congressmen gave speeches on controlling the budget. Some voted against it, but they knew that others would vote to raise it.

This time, Congress is playing poker with the world economy as its chips. If the Debt Ceiling is not raised within a few weeks, the U.S. will not have enough money in the bank to pay its bills. That’s never happened, but we know it won’t be good and will probably have unforeseen consequences.

Greece defaulted, has riots in the streets, and is at the mercy of other countries. Lehman Brothers defaulted in 2008 when the government refused a bailout, and over the following months unemployment doubled and the stock market lost almost half its value. Lehman Brothers was a New York investment bank. Large, but not the largest. And nothing compared to the U.S. government.

For 2011, U.S. revenues are $2.2 trillion and expenses are $3.8 trillion. We borrow 40 percent of what we spend. How would Congress reduce spending by 40 percent next month? To listen to the talking heads, it sounds easy.

Some, including Presidential candidates, U.S. Senators and Congressmen, are saying that default would be avoided if we pay the interest and “prioritize” other spending with available funds, or cutting all other government spending by half.

Some suggest across the board spending cuts. If serious, beginning next month, Social Security benefits would drop 40 percent along with reimbursements to health care providers, all government salaries, including our military, and interest payments to our lenders. That’s drastic, but social security, health care, defense, and interest on the debt account for more than 80 percent of the budget.
Others say “Just go back to 2003 spending levels” when spending was $2.2 trillion. That may sound logical, but that’s the same 40 percent cut.

Imagine an angry and crazy couple. One picks up their child and holds it over a bridge railing and says, “If you don’t do what I demand, I’m going to drop the baby and it’s your fault.” The other says, “No, it’s your fault.”

No crazy couple should negotiate that way. And neither should the Congress.

If Congress wants to cut spending, it holds the purse strings. The President can’t spend a dime unless Congress both authorizes and appropriates the money. If it were serious, Congress could pass legislation reducing spending by 40 percent and only give the President that much to spend with specific instructions. Parents do that all the time to their kids.

Economists and corporate CEOs are begging Congress to not play this game. Rating agencies are saying that the U.S. credit rating would drop below junk bond status. It would be unmitigated disaster.

But this isn’t real poker. It’s pretend. Everyone knows that the United States is not going to default. Congress operates like kids doing their homework on a school bus a few minutes before an exam.
This debate is about demagogy. It is about political posturing, blaming the other party, and gaining political advantage up until the last minute. It is not about what is best for the United States or the world economy.
At least with nuclear warheads, everyone agreed it was MAD.