One of the most important yet least acknowledged aspects of the debt ceiling drama currently gripping Washington is the fact that Republican stubbornness is increasing our national debt. Rather than placing the country on a sound fiscal footing, the GOP’s ongoing refusal to raise the debt ceiling has worsened our budgetary situation, and without resolution to the impasse congressional Republicans will plunge the country even further into the red.
Understanding why this is so requires that we think about the national debt in a dynamic rather than a static sense. Although people usually look at federal finances as a simple balance sheet composed of government outlays, i.e. spending, and revenues, i.e. taxes, the most important measure of a nation’s fiscal health is its debt burden, usually measured as a ratio of debt to gross domestic product (GDP). Since governments tend to spend more money than they collect in taxes, the key to a nation’s financial well-being resides in its ability to service its debt. In essence, the greater a country’s GDP the easier it can meet its obligations. Think of it like a mortgage: what matters is the homeowner’s ability to make his or her monthly payments, not the total amount of money owed on the house.
Looking at government finances in this way is particularly important given that the United States is currently able to borrow at extraordinarily favorable rates. For all our problems, the American economy remains the largest and most stable in the world. Volatility in Europe has driven up demand for U.S. government bonds, and as a result interest rates have fallen to historically low levels.
With our economy stagnating, the federal government should capitalize on this situation by borrowing more—not less—over the coming years. This would allow us to fund investments in infrastructure, education, and other job-creating programs, as well as provide support to cash-strapped state and local governments. Experts now agree that the Recovery Act of 2009 saved millions of jobs, and given current levels of unemployment a second round of stimulus is called for. In fact, growing the economy is the single best thing we can do to bring our national debt under control. Far from costing us money, greater government spending—especially when it can be financed cheaply—will help jumpstart the economy. This will, in turn, generate greater tax revenues, reduce spending on things like unemployment insurance, and make our debt burden more sustainable.
Yet instead of facing up to this reality congressional Republicans have chosen to play politics with the nation’s economy, tying their support for raising the debt ceiling to drastic cuts in government spending. Republican congressmen such as House Majority Leader Eric Cantor have argued that such measures are needed in order to reign in the government’s large budget deficits and ballooning debt—a nonsensical claim given that the debt ceiling increase is about allowing the government to pay back money that it has already borrowed. But in making the debt ceiling vote conditional on budgetary retrenchment, congressional Republicans have placed our fiscal future in jeopardy. If it continues for much longer, the GOP’s refusal to increase the debt ceiling will spook investors, drive up interest rates, and push the economy back into recession. Likewise, the austerity that congressional Republicans are demanding would disrupt the nation’s fragile recovery and throw more people out of work. In other words, by raising questions about U.S. creditworthiness and taking stimulus off the table, congressional Republicans are doing everything in their power to derail the American economy.
It is highly doubtful that the self-proclaimed “party of business” is unaware of these facts. Rather, congressional Republicans appear to be courting economic disaster. Based on their behavior to date, the GOP seems unconcerned about the negative impacts of a potentially catastrophic default on the national debt. Indeed, since presidents are usually blamed for economic problems it is not too much of a stretch to assume that Republicans would welcome chaos in the run up to the 2012 election. In a broader sense, recent Republican behavior also appears to have validated the decades-old charge that conservatives’ true fiscal goal is to bankrupt the government and thereby force the elimination of popular social insurance programs. It is yet to be seen whether this “starve the beast” theory will hold true in practice. But unless Congress and the president can figure out a way beyond the current impasse, our fiscal prospects appear bleak.