Few issues in American policy are so opaque and mystifying to most citizens as the economic stewardship of the country. Differences in policy become most pronounced when dealing with the national debt. It has assumed an uncharacteristically prominent position in recent weeks as President Obama is submitting his budget for the 2012 fiscal year, to be introduced in the House of Representatives.
Once the budget is finally decided and approved, it will be the fiscal policy the president must face should he run for reelection, which is a virtual certainty. The Republicans, who managed an effective campaign blocking many of the president’s initiatives over the past year through a combination of parliamentary procedure and strict discipline, now must share in the task of governing from a majority position in the House. The debt debate is typically multilayered and it seems these recent weeks have presented a rare opportunity to examine all of these issues at once.
First and foremost is the question of whether the debt ceiling will be raised. Whenever the government spends more than it takes in through revenue, it runs a deficit and this debt is paid for in the shorter term by other entities purchasing U.S. Treasury securities at a fixed interest rate. Although individuals can purchase these securities, the main buyers are typically business firms, the Federal Reserve, and foreign governments. All of the securities count towards the national debt.
The debt ceiling was first enacted in 1917 so that the bureaucracy could act in a more fluid manner when the government runs a deficit. Before this, whenever a deficit occurred, the Congress would have to approve individual measures to increase spending. The debt ceiling instead ascribed and limited the government to a pre-approved debt. A vote of the Congress is required to raise the ceiling even further.
This is at the center of the ongoing debate, with the current debt at roughly $14.1 trillion and the debt ceiling fixed at $14.29 trillion (a pittance by government standards). While this occurred in the past with few problems, some of the newest members in the House oppose the new measure. The move likely will be pushed through, but were it not to occur there is the possibility that the United States government’s credit rating could be downgraded in the banking system. Despite competition from the euro, the dollar is still the dominant trading currency in the world and America would likely avoid many of the troubles other monies have faced after similar downgrades, but such an occurrence could still be a catastrophic precedent.
This concern over the debt leads to the second part of the debate: the budget itself. After President Obama’s expansion of government programs over the last two years and the unemployment rate for January staying at a remarkably consistent 9.8%, the Republicans now feel confident to offer criticism after their own actions in the previous term produced similar results. The new budget measures out at $3.7 trillion and would run a deficit of $1.6 trillion. The president has made some minor motions towards austerity as the economy recovers with calls to remove all earmarks, freezing federal workers’ pay for two years, and making cuts in discretionary spending.
However, this leaves the two largest pieces of the budget, defense and entitlement benefits (Social Security, Medicare, et cetera), untouched and actually somewhat expanded. Until these are tackled as well, which would be hazardous for even the most popular of politicians, the debt will continue to expand and America’s growth will be impeded. Un-doubtedly, the next few months will produce a fiscal policy with consequences that, if mishandled, could pan out over a period of decades.