The Tribune

By Larry Gibson

As I pen this article, the US government is in partial shutdown mode, with some government services closed for business. The great irony is that this crisis is largely man-made because the Republicans and the Democrats cannot reach an agreement to raise the debt ceiling. If no agreement is reached by Thursday, October 17, 2013, the US Government will likely default on its debt payments. The thought of such an event is unprecedented. How could the world’s largest economy, the ‘self-proclaimed’ bastion of democracy and the most creditworthy nation in the world, default on its debt? This is incredible indeed.

While there is absolutely no doubt that some sort of compromise will be agreed before a default occurs, the whole world is watching in absolute horror. The entire nation is being held hostage for perceived political gain. How in the world can you, with a straight face, stand up and defend the elected congressmen and senators from allegations of being nothing more than “unadulterated jokers”? While there is universal agreement that the US needs to reduce its budget deficits and overall debt levels, there is wide consensus that this is not the way to achieve it.

In my view, this is a clear example of one of the imperfections of democracy. In this case, we have a small faction within the Republican Party, who with their sympathisers have been able to hijack the entire party apparatus for their own cause, which is anti-Obama and ultra conservative. As a result of the ‘Tea Party’s’ influence and intransigence, we have gridlock.

It will be interesting to assess how much damage is actually done as a result of this state of gridlock during the next few months. However, for now, we will try to explain what all the fuss is about.

What is the

National Debt?

The National debt is the sum of all outstanding debt owed by the Federal Government in the US. It includes not only the money the government has borrowed, but also the interest it must pay on the borrowed money. The government goes into debt when it doesn’t collect enough revenue to cover the expenses it incurs from spending on programs such as the military, or building roads and bridges. The revenues come from corporate and income taxes, capital gains taxes, death and inheritance taxes, and the various fees government imposes for various services, such as visas and passports, student loans and admission to national parks.

The US national debt is about $16.9 trillion, and its Gross Domestic Product (GDP) is about just under $15.9 trillion, according to the website http://www.usdebtclock.org/. I would urge readers to visit this site, as it shows the growth in the debt in real terms, and explains its various components. By contrast, in the Bahamas, our national debt is about $4.5 billion, with a GDP of about $8 billion.

What is the

Debt Ceiling?

The debt ceiling is a cap, set by Congress, on how much debt the US government can have outstanding at any time. There are only two countries in the world with a debt ceiling – the United States and Denmark.

The debt ceiling idea came about in 1917. Before then, Congress had to approve borrowing for each item when the government needed money. But to have more flexibility as the US entered World War I, lawmakers agreed to give the government approval for all borrowing - as long as the total was less than a specific number.

That debt limit number - usually set at a high figure - would be set by Congress. Whenever the government is going to exceed the debt limit, Congress has to vote its approval to raise it…hence the stalemate we are now experiencing. If the debt ceiling is not extended, the US will not be able to pay its bills.

The irony in all of this is that the US debt ceiling relates to expenditures that have already been made, and not expenditures contemplated. It is kind of like going into a restaurant, eating a meal and then deciding if you are going to pay for it. Morally, you are committed to paying for your meal.

It should be noted that the debt ceiling has been raised more than 70 times since 1962, and 10 times since 2001. On Ronald Reagan’s watch, which is generally regarded as the best economic period in recent times, the debt ceiling was raised more than 14 times and taxes rose more than eight times. I do not think there is a precedent in history where lawmakers in a democratic and capitalist system would have knowingly inflicted such damage on their own economy.

Clearly, no country can borrow indefinitely. The answer to national debt problems must include a combination of revenue increases (higher taxes) and spending cuts. If you do not pay your debts, credit initially becomes more expensive to obtain (higher interest rates) and then… credit becomes unavailable.

Facts about

the deficit

I wish to share an excerpt from an article written by Jim Brock, a retired executive and current director of Colonial Group International, who opined: “Since hitting a high of $1.47 trillion in February 2010, the US federal budget deficit plunged by more than 50 per cent to a new post recession low of $509.825 billion in the fiscal year that ended on 30 September, 2013.

“Two factors accounted for the bulk of the decline. Federal outlays have declined and revenues have grown. There has been no growth in federal spending since the end of the recession in mid-2009.

“If this trend continues, the deficit will be eliminated in less than three years, after which the US government should be able to run surpluses and begin paying off the debt. There has not been a surplus since the year 2000, when the government had a surplus in the last year of the Clinton administration.

“Although you would not know it from listening to comments from Republican congressmen, and from newspaper and television reports and commentaries, these facts show that Obama has done a fantastic job in reducing the US government’s annual deficit.

“The facts also show that under his administration the debt-to-GDP has fallen from 10.2 to 4.1. Of course, the Republicans deserve a lot of the credit for this deficit reduction, but the success that has been achieved and the trend the US Government finances are on is sufficiently hopeful that, in my opinion, the current fight that includes a threat of default is not necessary for further deficit reduction.”

Conclusion

My comments can be adequately summed up by a cartoon I saw on the Internet this weekend. It simply showed the four US presidents engraved into Mount Rushmore with brown paper over their heads and the words…THEY HAVE NO SHAME.

Until next week…

• NB: Larry R. Gibson, a chartered financial analyst, is vice-president - pensions, Colonial Pensions Services (Bahamas), a wholly-owned subsidiary of Colonial Group International, which owns Atlantic Medical Insurance and is a major shareholder of Security & General Insurance Company in the Bahamas.

The views expressed are those of the author and do not necessarily represent those of Colonial Group International or any of its subsidiary and/or affiliated companies. Please direct any questions or comments to Larry.Gibson@atlantichouse.com.bs