The United States government is due to reach its “debt limit” of US$28.4 billion on or around October 18.
The US loan limit is not like a credit card limit, which is imposed by a lender concerned about the lender’s ability to pay.
Rather, it is a form of self-delusion: a limit imposed by the debtor itself – the US government in the form of Congress – to limit borrowing largely required by Congressional decisions.
This statement, backed by a panel of prominent US economists surveyed by the Chicago Booth School in 2013, reflects the absurdity of the need.
Because all federal spending and taxes must be approved by both houses of Congress and the executive branch, a separate debt limit that has to be raised periodically creates unnecessary uncertainty and can potentially lead to poor financial results.
No one knows what will happen if Congress does not approve a regular increase in the debt limit required by its laws. What happens is that in the largely symbolic high stakes game of chicken each raise is cleared at the last moment.
If each increase is not approved, the US may be unable to borrow to meet its debt payments and default.
Read more: Why America has a debt cap: 5 questions answered
Or, and this was the basis of a contingency plan drawn up in 2011, it would delay payments for other things, such as contractors, employees, Social Security recipients and medical providers, to ensure that enough cash is freed up. Pay it off on continuing loans.
Either will be afraid to exit the financial markets, as is the fact that both are provoked every time Congress goes to decide what it has always done so far.
In an episode of Aaron Sorkin’s great TV show west wing, employee Annabeth Schott asks: “So this debt limit thing is routine, or is it the end of the world?”
White House press secretary Toby Ziegler responded: “Both.”
What happens if the US breaches the debt limit? Credit rating agency Moody’s says GDP could fall by close to 4% if the government defaults, could lose six million jobs, raise mortgage and commercial interest rates, and wipe out the value of US$15 trillion property markets. will be given.
Treasury Secretary Janet Yellen described the sequence as “disastrous”.
Will America once again raise the debt limit? almost certainly. But even a small chance of disaster is an unnecessary risk.
The politics of the matter is that Republicans want Democrats to raise the debt limit without Republican votes, preserving it as a campaign issue.
Since the Democrats have only 50 out of 60 votes in the Senate to force the vote, it requires a workaround. It probably will, but it’s a dangerous game.
Below, Australia flirts with this folly, then escapes from it.
Australia’s short credit limit
During the 2008–09 financial crisis, Labor introduced debt limits as a way of signaling its seriousness about economic management.
I would have thought that his success in saving Australia from recession did the trick, but I am just an economist.
Labor in its knowledge set the limit at $75 billion.
As losses continued to mount and tinkering with the debt limit was bad news, Labor raised the limit to $200 billion, then A$250 billion, then A$300 billion.
Read more: Debt limit is a belt when we already have braces
And, like the reckless Republicans in the United States, an opportunistic coalition in Australia opposed each increase.
Then, shortly after the Coalition took office in 2013, newly minted Treasurer Joe Hockey proposed a really big increase, from $300 billion to $500 billion, to eliminate the recurring character.
Labor took the high road, said it would not protest the kind it would even have to do in government, and refused to play politics. The debt limit was abolished, and everyone lived happily ever after.
actually no. I made it.
Lucas Koch/You
What Labor did was start making noises about opposing the increase. “I don’t believe he has come anywhere close to justifying the extraordinary increase in the debt limit,” said Chris Bowen, a Labor spokesman for the (otherwise generally sane) Treasury.
It was a bold suggestion from a journalist who provided the cut through. Peter Martin suggested Hawking bypass labor and struck a deal with the Greens to eliminate the ceiling entirely.
A fortnight later, hockey did the same.
Labor, realizing its mistake, backed the deal and promised to treat sovereign default in the same bipartisan way that the two major parties deal with issues of national security.
“Politics must stop at the door of sovereign default” said the opposition leader.
actually no. That didn’t happen either. Labor described the deal as “bizarre”.
broad lesson
One conclusion is that Australia was right to remove a silly hurdle that risked blowing up the economy for no good reason. We should say no to the loan limit.
But there is a broader lesson. Politicians of this country should stop doing politics on issues on which they agree.
Labor should stop complaining about “debt and deficit”, given that it would have done a lot more if it were in government.
Read more: Don’t worry about debt: the stimulus we need to survive the recession
And the Coalition must shut down the hypocrisy on a range of issues, including climate change, where it is likely to support policies like those when they came from Labour.
Electric cars were never going to end the weekend. The goals Australia pursued at the Glasgow climate talks are likely to support the switch.
Our politics can be better, but only if we have politicians.
This article is republished from – The Conversation – Read the – original article.
