The only thing more frustrating than the media ignoring a major story is it trying to report on one. The media have reported on the looming fights over the budget as if it were a singular event. All parts of the coming debate are certainly related, but there are three distinct events, each with their own time-line. The GOP would be wise to carefully pick where it makes its stand.
In the next two months, three distinct events will occur. Each provides a predicate to have a final resolution on fixing government's unsustainable spending binge. Our nation can't continue to post $1 trillion deficits in advance of massive baby-boomer retirements. Moreover, we've only been able to do it these past years because the Fed has expanded its balance sheet to absorb a lot of our debt and a sluggish world economy has kept inflation low. We can't assume these will go on indefinitely.
So, let's break apart the three-act drama slowly unfolding:
1. Debt Ceiling. The debt ceiling is simply the congressionally authorized limit on Treasury's borrowing authority. Once we reach the authorized amount of national debt, the Treasury can't assume more net debt. We will likely hit the limit sometime in mid to late February. Hitting the limit doesn't trigger a national default. We would only default if we stop making interest payments on our existing debt. The Treasury would just be forced to pay its bills out of its daily cash flow. Conceivably, the Treasury could make all its interest payments while putting off other spending. There are some practical problems to this, which we'll leave for another day.
2. Sequestration. During the last debate over the debt ceiling, in the Summer of 2011, Congress enacted automatic across-the-board spending cuts. The "fiscal cliff" deal delayed these cuts for two months. They are now set to take effect on March 2nd. It sets caps on discretionary spending and would trigger $109 billion in immediate cuts from spending, split roughly equally between defense and domestic programs. The immediate cuts are real while the remainder of the sequestration are reductions from future planned spending. In total, it is intended to trim spending by just over $1 trillion over the next decade.
3. Budget/Continuing Resolution. The government's current spending authority expires March 29th. If Congress doesn't approve a budget by then, or pass a "continuing resolution" to keep government running, the government will "shut down." There are some provisions for "emergency" functions, but the government would largely stop until Congress approves a new budget.
To recap the timeline:
- Mid February--Debt Ceiling
- March 2nd--Sequestration
- March 29th--Budget Expires
Each of these events provides a suitable backdrop to debate the proper level of government spending. Each warrants a fight over curtailing the growth of government spending. But, conservatives can not win all three fights. The Democrats control the White House and Senate and enjoy massive covering fire from the media. Conservatives, and the GOP in Congress, need to pick their fight.
Make no mistake, though, fight they must. For years we have kicked the fiscal can down the road. This year, the first baby-boomer turns 67. The youngest turns 49. We are about to hit a massive wave of retiring baby-boomers, which will cause current entitlement spending to explode. If we continue on our current path we will hit a very real debt ceiling--the market. Once the market decides not to invest in our debt, 1,000 platinum coins can't save us.
That said, conservatives need to pick the hill to fight, and possibly die, on. The debt ceiling is not that hill. The disruption in the market would be so severe that the GOP couldn't survive that public message battle. They will be filleted by simple talking points and their message will be drowned out by the media.
Avoiding the sequester is not that hill. Yes, there will be some pain when it is triggered, especially in defense. But, they are real cuts and set the stage for further spending reductions at the end of the month. If the GOP try to replace these cuts with other cuts, the White House and the media will insist on an equal amount of tax hikes.
The budget fight at the end of March is the hill where we should fight. All government spending, including entitlements, will then be on the table. Every government program will be open to scrutiny. The public is more in a mood for cutting spending than it was in the 1990s, the last time we had a government shutdown. If we can't win this fight, then we are approaching a long fiscal winter.
The GOP and conservatives should prepare for this fight. The House could pass a short-term extension in the debt ceiling, removing it from the Democrat's arsenal. If the Senate rejects that or Obama vetoes it, then they own any disruption that results.
The debt ceiling and sequestration are just symptoms of a larger problem. It's the budget, stupid. That's where we fight.
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