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Commentary

Let’s (Not) Make a Deal


     
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Now that the Senate has rejected “Cut, Cap, and Balance” Speaker Boehner and President Obama are bound to come up with an agreement that will raise the debt ceiling without making as large of a cut in government spending in return. If Republicans are serious about stopping the growth of government they should let the government hit its debt ceiling on August 2nd without making a deal. It would force greater and more immediate reform than Cut, Cap, and Balance and it wouldn’t be the end of the world.

House Speaker Boehner responded to the Senate vote by claiming, “Democrats have defied the will of the American people who overwhelmingly support real spending cuts, caps on future spending, and a balanced budget.” If real spending cuts, caps on future spending, and a balanced budget are really what he wants all he needs to do is let August 2nd arrive without an agreement and he’ll have them.

Hitting the debt ceiling would force the government to only spend as much as it receives in revenue since it would no longer be able to issue more debt. That automatically puts limits on future spending and forces the government to balance its budget. It also implies real spending cuts.

The federal government spends a little more than $3 trillion and takes in a little more than $2 trillion in revenue annually. Balancing the budget would force the government to cut expenditures by roughly one third. Though that sounds like a large cut it would only bring inflation-adjusted spending down to approximately the level it was at when President Clinton left office—hardly an era of small government.

Interest on the debt has grown about 14 percent since 2000, but at a little over $400 billion a year the government still takes in more than enough revenue to pay it. So those who have dubbed Tea Party Republicans, who have said it was Cut, Cap, and Balance or nothing, the “Default Caucus” are being disingenuous. Failure to raise the debt ceiling need not mean default. But paying the interest does mean that bigger cuts would need to be made elsewhere.

All government spending is ultimately discretionary. Cuts of the magnitude necessary to balance the budget will likely require cuts to entitlement spending. But Social Security and Medicare have long been in need of reform. Hitting the debt ceiling may allow cuts to these programs that otherwise would not have been politically possible. If Republicans really favor reducing the size of government, they should embrace the opportunity that hitting the debt ceiling provides.

President Obama has said he, “cannot guarantee that those [Social Security] checks go out on August 3rd” if the debt ceiling isn’t raised. Hitting the debt ceiling doesn’t mean that grandma won’t get her check next month. The point of Cut, Cap, and Balance was to allow the debt ceiling to increase in the short run while spending cuts are phased in that would eventually balance the budget. But even without raising the debt ceiling the government is capable of gradually transitioning to a lower level of spending.

The federal government has vast holdings of land in the west, a petroleum reserve, gold in Fort Knox, and commercial real estate in major cities. Selling off federal assets could provide a temporary source of revenue to balance the budget while transitioning to a lower level of spending. The transition may have to occur quicker than it would have if the debt ceiling was raised, but all of the cuts need not be overnight. Advocates of smaller government should view the privatization of government assets as an added bonus.     

If the Republicans really want to shrink government this is a golden opportunity. Hitting the debt ceiling without an agreement would necessitate large spending cuts and force the government to balance the budget. If the government wants to ease the transition it could sell off government assets during the transition. Advocates for smaller government could never hope to broker a better deal than the one they can force by simply not making a deal. 


Benjamin Powell is a Senior Fellow at The Independent Institute, Director of the Free Market Institute at Texas Tech University, and former President of the Association of Private Enterprise Education. Dr. Powell received his Ph.D. in economics from George Mason University. He has been Assistant Professor of Economics at San Jose State University, Associate Professor of Economics at Suffolk University, a Fellow with the Mercatus Center's Global Prosperity Initiative, and a Visiting Research Fellow with the American Institute for Economic Research. He is also the editor of the Independent Institute books, Housing America: Building out of Crisis and Making Poor Nations Rich.






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