Insane Chatter

Piling more debt onto the federal government’s existing mountain of IOUs means “shifting the burden of bad choices today onto the backs of our children and grandchildren,” according to Barack Obama.

But those were the words of Sen. Barack Obama, back in 2006. As a president and cabinet who are presiding over $1.3 trillion in annual deficit spending, Obama and his administration see things a little differently. One of Obama’s top priorities in the new Congress is to get an increase in the federal credit limit, otherwise known as the debt ceiling, which he opposed raising in 2006.

Austan Goolsbee, Obama’s chief economic adviser, went so far as to warn on television this week that failing to raise the debt ceiling would trigger “the first default in history caused purely by insanity.”

A lot of bad things are likely to happen if government borrowing abruptly slams into the ceiling, but Goolsbee is both wrong and alarmist when he claims that default would automatically follow. As for insanity, well, perhaps Goolsbee can tell us exactly what meds were necessary to bring Obama back to free-spending reality after his apparent breakdown less than five years ago. Or maybe Goolsbee can muster enough candor to acknowledge that this controversy is not about much more than posturing, on both sides.

The debt ceiling currently rests at $14.3 trillion, where Congress pegged it last February. If the government wishes to borrow more than $14.3 trillion, Congress must approve another increase. Currently, the Treasury’s total borrowing is around $13.9 trillion. That leaves about $400 billion of borrowing potential, which not very long ago would have provided a lot of breathing room. At the current rate of deficit spending, the Treasury will hit the limit in a few months.

While Republican House Speaker John Boehner has expressed support for raising the ceiling, newly elected Tea Party Republicans are putting up a fight. They want to show budget-conscious supporters that they mean business. Meanwhile, last month, Obama’s debt-reduction panel failed to agree on a plan, proposed by its chairmen, that would have reduced the annual deficit to about $400 billion in 2015, leaving Democrats without a clear plan to get spending under control once the ceiling goes up. Of course, some relatively minor near-term reductions aside, at present Republicans have no such plan either, apart from a long-term proposal by new House Budget Chairman Paul Ryan, R-Wisc., that has not gotten much support from either party.

This is not the first time a budget debate has turned into a debt ceiling standoff. In 1995 congressional Republicans, led by then-Speaker of the House Newt Gingrich, responded to Clinton’s veto of their budget by holding up an increase in the limit. Clinton still refused to budge, sending the government into a “shutdown,” during which workers were furloughed and non-essential services were put on hold. In the end, the public saw Gingrich as the bad guy. The debt ceiling increase was eventually approved, and a strong economy produced surging tax revenues that soon brought the federal budget into surplus. Boosted by his successful showdown with Gingrich, Clinton easily won reelection in 1996.

A modern reenactment of this face-off, however, could turn out quite differently. Economic growth is not going to make our current enormous deficit go away. Clinton did not have to contend with two wars, a nearly double-digit unemployment rate, and an unresolved mortgage crisis. Also, in the mid-1990s, the baby boomers were entering the peak earning years of their careers and the stock market was surging, both of which helped drive up federal income tax revenues. Now the stock market is trying to recover from a historic crash, while the boomers are beginning to turn 65, at which point many will sign up to spend the rest of their lives on the government dole.

Only spending restraint, including unpopular cuts in Social Security, Medicare and other entitlements, can slow or stop the growth of the federal debt heap.

Refusing to raise the debt ceiling is one way to achieve that spending restraint, but it is also the harshest way – which is why, except possibly for a brief period when somebody wants to make a point (as in 1995), the ceiling is certain to be increased.

What would happen if the ceiling remained unchanged? Not the government default that Goolsbee predicted. There was no default in 1995. Maturing debt can be replaced with new debt without breaching the ceiling. But because incremental borrowing would be prohibited, the government could not spend more money than it takes in through taxes or other revenue sources. The budget would have to be instantly balanced.

Given the massive scale of today’s deficits, this would mean considerably more disruption than occurred during the last so-called “shutdown” in 1995. But it would not mean default, unless Goolsbee intends to imply that the Treasury would rather stiff its creditors than, say, curtail unemployment benefits for Americans who expect to receive them.

This would be an Argentina-style breach of faith that, until recently, was utterly inconceivable for the world’s leading economic power. Now, it is merely very unlikely. When the president’s top economic guru puts stiffing the creditors on the table and declares that this is the inevitable result of the administration not getting what it wants, you can’t completely dismiss the possibility.

Not even the most hyper-caffeinated Tea Party zealots expect to balance the federal budget in the next few months. You don’t stop a speeding car with bad brakes by steering it toward the nearest brick wall. Therefore, the debt ceiling is going to get raised.

Default, if and when it comes, will occur because we can’t find anyone willing to lend money to us to replace expiring debt. Shrill false alarms like Goolsbee’s serve only to bring that day closer.

About Larry M. Elkin 534 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

Visit: Palisades Hudson

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