woody_zimmerman_118_2007President Obama and Congressional Republicans are playing a high-stakes poker game on the debt-ceiling and the economy, with voters and federal beneficiaries standing by as fascinated onlookers. Mr. Obama is determined to force a deal that makes Republicans agree to raising taxes in some way, while Republicans are equally determined to make a deal that includes no increases in taxes and significant cuts in expenditures. As we approach the time when the federal government can no longer borrow new money – somewhere around August 2nd, by some estimates – it’s going to be interesting to see who blinks first.

Reports from media and some politicians inform us that after the date when the total federal debt reaches the current debt-ceiling of $14.5 trillion, the government will no longer be able to pay its bills. This, of course, is not quite correct. The government will still be receiving a stream of tax-receipts. But that income-stream is not enough to cover all of the government’s bills, as a deficit of some $1.7 trillion exists between receipts and budgeted expenditures. Without a debt-ceiling increase, additional money can’t be borrowed to cover all monies owed by the government from that point onward.

Does this mean “default” on the government’s debts, as administration officials have warned? That depends on what we mean by “debts.” Without new borrowing, the government would certainly incur expenses it can’t cover. Technically, these are also “debts.” But most people who speak of default mean not paying the owed interest on the entire national debt. This amounts to about $314 billion a year, at current interest rates of 2.2%. Defaulting on these payments almost certainly will not occur, as there is plenty of income available to cover that interest. What would happen, instead, would be stopping payment on other commitments, such as Medicare, welfare to states, and any number of politically selected cuts. As any family can easily understand, the federal government would have to reduce its outlays such that its income and outgo are balanced.

What most people – including, as it appears, most media reporters – do not understand is that the president would have the lead in any decisions about which federal expenditures to postpone if the debt-ceiling has not been raised. This is Mr. Obama’s “hole-card” in the debt-ceiling poker game going on now, and possibly continuing through the summer. He knows he can control the emergency cuts, and Republicans know it, too. Mr. Obama has already set the parameters by accusing Republicans of wanting to deny old people medical care, keeping students from getting scholarships, etc., etc. If any of these occurs, it will be because Mr. Obama has chosen them. But he will undoubtedly use his formidable rhetorical gifts to try to convince voters that it is all the fault of mean-spirited Republicans.

The federal budget is almost incomprehensibly large, defying the ability of any one person to grasp its details. I have no such pretentions. Occasionally, though, some details do emerge from the fog. One fascinating detail that I saw recently was the statistic that the federal government pays $450 billion a year in “aid” to states and cities. (I had no idea such a gigantic sum was involved.) By any reckoning, this is serious money – nearly 13% of current budget outlays. Those subsidies would be tempting targets in any protracted situation where more federal debt could not be incurred. Cuts could be selectively made, via any political calculus the president might choose to employ. Mr. Obama could use those cuts to punish his enemies, while claiming that he was merely acting out of fiscal responsibility.

Democrats’ position is essentially that all current budget expenditures must stand, while taxes must be raised on “millionaires and billionaires” to bring the budget into balance and make the “rich” pay their “fair share.” Mr. Obama has been traveling round the country declaiming about ending tax breaks for corporate jets and subsidies for Big Oil. Democrats know that this has a certain populist appeal, but the amounts of revenue raised by ending these tax “loopholes” would be insignificant in the context of a $1.7 trillion annual deficit. This is all just political posturing. It would do nothing about the deficit.

Indeed, ending the corporate jet tax break would raise only $3 billion in additional revenue over 10 years – i.e., new tax receipts of only $300 million a year. It’s easy to get lost in millions, billions and trillions, but trust me, $300 million is a long way from the $1.7 trillion hole we’re in every year (only 0.02%, to be precise). Ending these tax loopholes would be largely symbolic – a way to get Republicans to share the heat on raising taxes. In terms of actual deficit reduction, though, it would be virtually meaningless.

Another favorite Obama talking point is “ending the Bush tax cuts” for those same millionaires and billionaires – those malefactors of great wealth who make over $200,000 a year. This is another fool’s errand that Democrats hope some Republicans will run after. In her article of April 8, 2011, Megan McArdle, Business and Economics Editor for The Atlantic, furnishes data on income for 2008, as presented in the following table:         

Income > $100,000/yr.

$1,582 billion

Income > $200,000/yr.

$1,185 billion

Income > $500,000/yr.

$820 billion

Income > $1,000,000/yr.

$616 billion

Income > $2,000,000/yr.

$460 billion

Income > $5,000,000/yr.

$302 billion

Income > $10,000,000/yr.

$212 billion

Total Income, USA

$5,488 billion

 

At a glance, it’s easy to see that taxation of incomes over $100,000 a year at 100% would not come close to funding the annual federal budget of $3,700 billion. Even the current deficit of $1,700 billion could not be covered by confiscating those incomes entirely. Thus, any talk of closing the deficit by “ending the Bush tax cuts” for earners making over $200,000 a year is entirely fanciful. Mr. Obama’s insistence on it is only for the purpose of animating his liberal and populist base. There is no quick way to get out of the fiscal hole we’re in. (Of course, the idea of 100% taxation is given only as a boundary point. Nothing of the kind could be done in reality.)

“These are the times that try men’s souls,” Thomas Paine famously wrote, at the outset of the American Revolution. The same could be said of our times. The great American Experiment is caught in a fierce tug-of-war between competing visions for the nation’s future. One side wants individual freedom to achieve, earn and grow, with minimal interference and taxation from government. The other side wants endless provision by government to meet every human need and desire. Government’s demands for the funding to furnish that provision has now outstripped the people’s willingness to pay. We are, in fact, a “house divided.”

The Bible says “a house divided against itself cannot stand.” Expanding on that text, Abraham Lincoln said (regarding the nation’s division over slavery):

“I do not believe the house will fall, but I do believe it will cease to be divided. It will become all one thing, or all the other…”

In that assessment, Mr. Lincoln was entirely correct. There was no way for us to continue as we were. I believe this applies to us today. We cannot continue as we are. Something has to give. With respect to taxation and federal spending, we must go over entirely to the new vision, or we must return to the vision that made us the greatest nation in history. We shall become all one thing, or all the other.