July 31, 2011
Economics Department
No Way to Run a Country
I'm really tired of hearing about the debt ceiling, and I've avoided contributing to the cacophony so far, but I just have to get this off my chest. It's not so much that I think one side is right and the other side is wrong. Rather, I think everyone who created this mess deserves a kick in the ass from every America. Unfortunately, parts our current problem are the result of some really bone-headed thinking long ago, and the culprits aren't around any more. Let me explain...
First of all, consider how the national debt arises. It happens because government spending is greater than government revenue, and the amount of the debt is equal to the difference between spending and revenue. In mathematical terms,
debt = spending - revenue
Now let's consider where each of those terms comes from.
The spending term is essentially the entire federal budget. Sometimes it's a specific amount to be spend on a particular budget item, such as the budget for the FBI, or the cost of running an infantry division, and other times the spending is authorized in the form of an entitlement, such as social security or medicare. The budget is incredibly complex and detailed, and it is essentially authorized by Congress.
The revenue term is essentially federal taxes, including payroll taxes, income tax, gas tax, phone tax, tariffs, fees, and any other way the government can think of to squeeze money out of us. Parts of it vary with the activity of our economy, but all of it is essentially authorized by Congress
The debt term is the amount of money the government is allowed to borrow. Ever since the Public Debt Acts passed around 1940, it has been subject to an upper limit (the infamous ceiling) set by Congress.
At this point, anyone with a background in math (or science or engineering or economics or business...) should see a very obvious problem: The system is overdetermined.
We've got a system of three variables related by an equation that uses all three variables. In a situation like that, once you know any two variables, you can always solve for the third one. If you know spending and debt, you can solve for revenue:
revenue = spending - debt
And if you know revenue and debt, you can solve for spending:
spending = revenue + debt
And as we said at the outset, if you know spending and revenue, you can solve for the debt:
debt = spending - revenue
In other words, once you determine any two of these numbers -- perhaps by passing a budget and a tax plan, thus determining spending and revenue -- you have mathematically determined the value of the third one as well.
In this case, Congress has spelled out the spending plan and the revenue plan, which of course implicitly determines the debt. Our Congress, however, also spells out the debt (or at least an upper limit to the debt), which means they have determined more of the variables than they should. The system is overdetermined. And as is often the case with overdetermined systems, there is no exact solution. Thus the current crisis.
The only way to fix this is that something in the system has to change to make the equation work with the numbers. The equation itself is an accounting identity, so it can't be changed, which means that one of the variables has to change. Normally, it's the debt that would be changed, by raising the debt ceiling, but this time there's an argument. Republicans want to hold the debt fixed and change spending instead, and in return, Democrats are now arguing that a revenue increase is in order.
This is no way to run a country.
None of this would be necessary if Congress hadn't tried to control all three variables in the budget equation at the same time. Unfortunately for those of us yearning to kick the bums out of office, the current members of Congress aren't entirely to blame. Much of the problem goes back to the Public Debt Acts passed between the Great Depression and World War II, which established the debt ceiling. And the problem may extend all the way back to 1787, when the United States passed its Constitution, which gave Congress the power to spend money, raise revenue, and "borrow Money on the credit of the United States."
Still, it's a stupid mistake that could be easily fixed by removing the debt ceiling entirely and, if necessary (and I suspect it is) passing a law that specifically authorizes the Treasury to borrow money to meet the debts that arise as a result of the spending and revenue plans passed by Congress. This takes nothing away from Congress, since they are still in complete control of the other two variables of the equation.
Well, it takes one thing away from Congress: It takes away the ability to do a lot of stupid grandstanding by taking the federal budget hostage. If the Tea Partiers want to reign in the federal deficit -- something which, broadly speaking, I agree needs to be done -- the proper way to do it is by controlling federal spending. (Or, if you lean that way, you could do it by raising the taxes.) But that would require specifying exactly which spending you propose to reduce, which will surely anger the voters who benefit from it.
The federal debt ceiling, however, is a single number with no internal parts assigned to constituencies. That makes it much safer politically. So we have this massive Republican opposition to raising the debt ceiling, but when it comes to actually cutting spending, there's little agreement within the party how to do it. Finding an agreement with the Democrats will be even harder.
My prediction, by the way, is that the Republicans and Democrats will cut a deal to raise the debt ceiling before anything drastic happens. Of course, in order to reach that agreement, each side will have to receive something good in return, and there's a pretty good chance that (a) the final bill will be larded full of many pages of special provisions designed to win support from various members of Congress, (b) no one will really know what it says, and (c) it will somehow end up costing us more than if we'd simply raised the debt ceiling.
This is no way to run a country.
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