Nine False Statements About the Debt Limit

Politicians have made many claims about the debt ceiling. Here are nine myths you may have heard:

Myth #1: Without raising the debt ceiling, the United States will default on its debt.

The United States will have $307 billion in bills due in August and about $172 billion in revenue. The interest on the debt in August will be about $29 billion. The United States will have more than enough money, therefore, to pay its debts. Since not paying debts would have catastrophic global consequences, Treasury Secretary Timothy Geithner will make sure that these bills are paid first.

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Myth #2: We can avoid raising the debt ceiling without serious consequences for the economy.

If the debt ceiling is not raised, the federal treasury will be short about $135 billion in August. This means that there are a lot of people who expect to get paid in August who will not get paid. These could be companies who have sold supplies to the military, government workers (including active-duty troops), doctors who serviced Medicare patients, and those on unemployment or Social Security, for example.

Besides the personal hardships for those who would be expecting those checks to arrive, it would be taking $135 billion out of the economy at a time when unemployment is high. The effect would be a worsening of an already weak economy.

Myth #3: A debt ceiling is necessary.

Most nations do not have a debt ceiling. Congress makes the federal budget. It decides how much debt the country will take on when it passes the budget. Congress then imposes a debt ceiling on top of that.

Imagine you borrowed $30,000 to buy a car. Then, after the purchase, you decide that you are going to take on no more than $20,000 of debt. Well, you already decided that you would have $30,000 of debt when you bought the car. So, you have two choices. You can raise your self-imposed debt ceiling, or you can default on your car payments.

This is, essentially, what Congress has done. Congress can default on some payments that it already committed itself to make, or it can raise its self-imposed debt ceiling.

Myth #4: If we just raised the debt ceiling, without any plan to reduce deficits, there would be no effect on the nation's credit rating.

The “Big Three” credit rating agencies, Moody's, S&P, and Finch, have said that if the debt ceiling is not raised, the nation's credit rating could be downgraded. That is not, however, all that they said.

The nation is currently on a fiscally unsustainable course. The costs of three government programs, Social Security, Medicare, and Medicaid, are rising so rapidly that they threaten to bankrupt the country. If this were to happen, the United States might genuinely find itself in a situation like Greece where it cannot pay its creditors.

For this reason, the credit ratings agencies have warned that if Congress and the president do not also make changes that would put the nation on a path toward fiscal sustainability, they might downgrade the nation's credit rating. A debt ceiling increase without a significant deficit reduction package could, therefore, also lead to a credit rating downgrade.

Myth #5: President Obama's “balanced approach” idea is the middle, or compromise, position between the Republicans and the Democrats.

Obama has presented his idea for a “balanced approach,” meaning spending cuts and revenue increases to reduce the deficit, as the “middle of the road” position. This would be true if the Democrats' position were to balance the budget only with revenue increases – they have not. Reducing deficits through a combination of revenue increases and spending cuts is the Democrat's position, not the middle position.

Indeed, even when Democrats had large majorities in the House and Senate and President Obama was still popular, they did not have enough votes to raise revenue through increased taxes. This indicates that they have only partial support for revenue increases in their own caucus.

Myth #6: Obama and the Democrats have shown a willingness to compromise while the Republicans have not.

All sides have positions they will not compromise on. Republicans have said will not support a deal that increases taxes. Democrats have said they will not support a deal that does not have revenue increases. Obama has said he will not support a deal that does not raise the debt ceiling enough to last until after the 2012 election.

If anyone has shown a willingness to compromise during these negotiations, it would be House Speaker John Boehner. He worked with President Obama on a deal that would have raised $800 billion in revenue (through tax reform), along with almost $2 trillion in spending cuts. After Senate Democrats got upset that they were left out of the negotiations, Obama asked for an additional $400 billion in revenue, at which point Boehner walked away from the negotiations.

This week, Boehner has been working on a proposal that would do about the same thing, but in a two-step process, something Obama does not like. Obama has threatened to veto the bill because he wants a one-step process. Senate Majority Leader Harry Reid has said Democrats will oppose it. And Boehner is threatened with a revolt from many in his own caucus because they do not like the revenue increases. Boehner must be asking himself, as Obama said of Republicans last week, “what will they say 'yes' to?”

Myth #7: The plan put forth by Speaker Boehner this week was designed by Tea Party Republicans.

Myth #7 comes courtesy of Reid, who this week said that Democrats would not support Boehner's plan because it was designed by the Tea Party Republicans in the House. This must have been strange news to Boehner, who was told by some Tea Party Republicans that they would not support the plan.

Myth #8: By opposing any increase to the debt ceiling, House Tea Party Republicans are giving their leadership a stronger position in the debt ceiling negotiations.

Some House Republicans, such as Michele Bachmann (Minn.) and Ron Paul (Texas), have said that they will not support a debt limit increase under any circumstances. The more Republicans that take this position, the more Democrats Boehner will need to pass a bill. This would give Democrats an edge in the debt limit negotiations. This is why Boehner told his caucus on Sunday night, “If we stand together as a team, our leverage is maximized, and they have to deal with us. If we’re divided, our leverage gets minimized.”

Myth #9: Since Democrats hold the Senate and the presidency, and Republicans only hold the House, Democrats have the advantage in the debt ceiling negotiations.

Many House Republicans won election or reelection in 2010 with promises to reduce federal spending. For a large number of them, this task is more important than raising the debt ceiling. Their willingness to stand together on this promise has given Republicans the advantage in debt ceiling negotiations. A debt ceiling increase cannot be passed without support from the House. This veto power essentially means that the debt ceiling will not be increased unless House Republicans get a significant amount of what they want.

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