Tuesday, July 12, 2011

Not Raising the Debt Ceiling Means Raising Taxes

The debate over the raising of the debt ceiling has been in the news quite a bit recently, and it has come up for good reason. If the U.S. does not raise the debt ceiling, the government will be unable to take on more debt in order to fund its current financial obligations. This new debt is significant; the monthly budget deficit in February, for example, was 223 billion dollars.

Now, if you’re reading this, you are likely fairly financially savvy, and you probably know that it is usually not a good idea to take on debt in order to pay off debt. This action is non-sustainable; you can only push money from one lender to another for so long.

The caveat to the rule of not taking on new debt to pay for the old debt is that if you’re able to borrow at a rate lower than your old rate, then you should almost certainly take on the new debt. As an example, if you have $1,000 on a credit card that is charging 14.9% APR, and you receive a 0% balance transfer option from another credit card or lender, you should pretty definitely transfer the money. On the flip side of the coin, if you have that thousand bucks on a credit card with a low interest rate, but you find that you’re short on money that month, should you fail to make, at least, the minimum payment?

No, you shouldn’t. You should always pay at least the minimum. Any why is that? Because if you don’t pay at least the minimum that you owe on a credit card, you will be subject to both late fees and having the APR on your debt raised. This is true of basicaly any and all debt a person, business, or country can take on.

And yet, this is, essentially, the untenable position that politicians who refuse raise the debt ceiling are taking. If the United States defaults, or is late, on any of its current debt obligations, the credit rating of the United States will get worse. Correspondingly, the low interest rates the U.S. has been afforded will likely go up, and so the U.S will effectively be paying more money to pay off its current debts.

Now, don’t get me wrong. Speaking in generalities, I lean towards the right politically (though, like many people in my generation, I don’t feel that I owe anything to any particular party), and I tend to favor small government. Also, I think much of the federal budget is due for an audit, and I think that certain social programs need to be reined in if not altogether done away with. Further $223 billion dollars is a ridiculous deficit for one month, and I firmly agree that spending needs to be cut. Even so, as it is the political right that is making a big deal out of raising the debt ceiling, I find myself at odds with my background.

To me, the issue of interest rates on the national debt is really what is at stake in the current debate. Is the current level of debt that the government takes on unsustainable? Absolutely. Should spending be cut? Certainly. Should we risk having the trillions of dollars that the U.S. currently has in debt face higher interest rates because one party is attempting to make a political point? Under no circumstances.

It is curious to me that those politicians who don’t want to raise the debt ceiling also are insistent on not raising taxes; it is also curious to me that these same politicians did not make a fuss any of the ten times the debt ceiling has been raised since 2001 (or the 74 times since 1962!). What those who are fighting to not raise the debt ceiling seem to fail to recognize is that should we default on parts of our national debt, the debt will only continue to rise anyway. If the debt rises today, more income is going to be needed to pay it off tomorrow. And how does the government raise income? By raising taxes.

Do you think the debt ceiling should be raised? Or are you of the camp that believes that not raising the debt ceiling will send a message to government that they can’t spend so much anymore? Let me know in the comments.

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