Each day brings seemingly dozens of updates on the budget negotiations surrounding the debt ceiling debate. Over the last few weeks, there have been major addresses to the nation by President Obama and House Speaker John Boehner; the progress and then dissolution of Vice President Joe Biden's negotiation group; various iterations of plans proposed by Senate Majority Leader Harry Reid, Boehner, the Gang of Six, Senate Minority Leader Mitch McConnell, and Reid and McConnell combined; and the passage of House Republicans' "Cut, Cap and Balance" bill. President Obama has pushed for a "big deal" -- at one point calling for deficit reduction of $4 trillion over 10 years.
The debate has been exhausting and at times too confusing. It has put a dent in the approval ratings of all lawmakers. And, as our country staggers toward the August 2 deadline -- the date by which Congress must approve of a debt limit increase or greatly compromise our nation's abilities to function -- now is the time to see the forest through the trees. With that in mind, here are five important points to remember about the debt ceiling.
1. A default would be terrible for our country
The budget negotiations of the past month have sought to secure the votes of those members of Congress who are opposed to passing a clean bill to raise the debt ceiling, and who have stated they will not vote in favor of an increase without also passing significant reductions in the deficit or spending. The debate over deficit reduction aside, failure to sufficiently increase the debt limit by Treasury's deadline would cause our country to default on our obligations.
From an economic standpoint, a failure to increase the debt limit would further hobble our already feeble economic growth. As 235 leading economists stated in a letter to Congressional leaders, failure to raise the debt limit could have "potentially grave long-term consequences." This includes "undermin[ing] the full faith and credit of the United States government," which would lead to higher interest rates for the government as well as businesses and consumers, and would negatively impact job growth.
2. A balanced budget amendment is bad economics
Many of the demands coming from conservatives have included a call for a balanced budget amendment. Though responsible-sounding in rhetoric, a constitutional balanced budget amendment would be disastrous in practice, particularly during times of recession. A balanced budget amendment would debilitate what are called automatic stabilizers -- policy tools that kick in to provide support during recessions by limiting the decline of consumer purchasing power. A balanced budget amendment would thus make recessions deeper and more prolonged.
A balanced budget amendment would require a super-majority vote in each chamber of Congress to adopt an unbalanced budget - something that Congress has done in all but five of the last 50 years. Requiring a super-majority vote for something that has been common practice would almost certainly lead to an increase in the type of legislative gridlock we are seeing today. Once again, there is strong agreement among renowned economists that a balanced budget amendment is a bad idea.
3. Immediate spending cuts would cost, not create, jobs
One myth being perpetuated is that high deficits impede job creation; therefore, cutting spending will create jobs. From a macroeconomic standpoint, this is simply not true. In fact, immediate cuts to spending levels would lead to job losses, with the severity of job losses dependent on the size and scope of proposed cuts. Taking money out of the economy is never a recipe for creating jobs; in fact, the opposite is true. Stimulative spending during a recession fills the hole caused by a contraction of business and consumer spending, keeping jobs in the economy and staving off layoffs. By the end of 2010, for example, the Recovery Act was responsible for creating or saving between three million and four million jobs.
In the past year congressional Republicans have introduced a number of spending cuts packages that would negatively impact jobs. Last fall, Speaker Boehner proposed reducing non-security discretionary spending to 2008 levels, which would have caused the reduction of over one million jobs. This spring, House conservatives proposed cutting spending by $100 billion relative to President Obama's fiscal 2011 budget proposal, which would have produced an estimated loss of 994,000 jobs. The House-passed Republican leadership budget, estimated at the time to cut $61.5 billion this year alone, would have cost roughly 600,000 jobs (when estimated relative to the CBO January baseline).
4. Revenues are essential to a balanced deficit-reduction approach
There are ways to reduce the deficit while maintaining both public investments and a strong and reliable social safety net. Investing in America's Economy, a budget blueprint compiled by the Economic Policy Institute, Demos, and The Century Foundation, achieved long-term debt stabilization while both investing in national priorities and avoiding harmful cuts to important social programs.
The current debate has, for the most part, lacked the balance seen in the blueprint by largely insisting that all deficit reduction be achieved through spending cuts. The reality is that smart deficit reduction must address our lack of revenues as well. Revenues are projected to be 14.8% of GDP this year, the lowest level seen over the last 60 years. Deficit reduction must include increasing revenue levels as well as decreasing spending levels.
Furthermore, revenues are something we can afford to increase, if done wisely. The George W. Bush tax cuts of 2001 and 2003 disproportionately benefited the top one percent of earners (who received more benefit than the lower 80 percent of income earners) while doing little for low-income families. Making all of the Bush tax changes permanent, which would largely and unnecessarily benefit those making over $250,000 annually, would cost an estimated $4.6 trillion over the 2012-2021 period.
Repealing those tax cuts is something high-income individuals can afford, and would impact only those who have reaped the majority of economic gains over the past decade, as well as the past 30 years. From 1979-2007, the top 10 percent of income earners claimed 64 percent of gains to overall incomes, while the bottom 20 percent saw 0.4 percent of all gains to income. In 2007, alone, the top 1 percent of earners took home around 20 percent of pre-tax national income, while the bottom 90 percent of earners took home around 58 percent. Wages for those at the high end have been growing significantly faster than for those at the bottom of the wage scale, yet taxes on both income and assets have fallen at the top.
Additionally, in poll after poll the American public has consistently called for putting revenue increases on the table. A recent poll analysis by Capital Gains and Games blogger Bruce Bartlett found that people support higher taxes to reduce the deficit by a 2-1 margin. This is truly a case of Congress rejecting the will of the people.
5. This debate has distracted from what remains our country's biggest problem -- a lack of jobs
The fact is, the U.S. labor market remains terribly weak. Disappointing monthly jobs numbers are demonstrating that our current pace of overall job growth will mean unemployment and underemployment for millions of Americans for years to come. Policymakers, however, have turned to austerity at a time when they should be prioritizing job creation.
Americans want a fiscally responsible government, but even more than that, we want to be productive members of a strong and growing economy. Our deficits will not shrink without strong growth, and strong growth will not occur without millions of new jobs. Americans have been led to believe that fiscal austerity is a key ingredient to job creation in the short-term; it is not. A focus on spending cuts has instead greatly detracted from what should be a strong effort by policymakers from both parties to work together toward job creation and economic growth.
Economic Policy Institute Research and Policy Director John Irons co-authored this post