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DEBT-LIMIT Remedy Gives Fiscal Hawks Leverage – RCP

February 21, 2011

February 20, 2011

Debt-Limit Remedy Gives Fiscal Hawks Leverage

By Daniel Mitchell

What happens when an unstoppable force meets an immovable object? House Republicans can pass all sorts of legislation to reduce the burden of government spending, but they don’t control the Senate and they can’t override a presidential veto. President Barack Obama, meanwhile, lacks the power to compel Congress to approve Democratic goals, including higher taxes.

This is a recipe for gridlock. And gridlock means bigger government: Democratic proponents of the status quo are in much stronger position to prevail because there are few ways for budget cutters to exert their will.

But there is some hope because of a “must-pass” piece of legislation. The president wants Congress to increase the statutory debt ceiling of $14.3 trillion so that government operations remain unaffected. Republicans oppose this business- as-usual approach and are insisting on real fiscal reforms in exchange for a higher ceiling.

If neither side budges, and the debt ceiling remains fixed, some people worry this might lead to a default by the U.S. government. More specifically, they’re concerned that the inability to issue debt would compromise the Treasury Department’s ability to make scheduled payments to bondholders. They also worry this might lead to a Greek-style sovereign-debt crisis that would destabilize financial markets.

This seems like an overblown fear. After all, the federal government is expected to collect more than $2.1 trillion of tax revenue this year, while interest payments on the publicly held debt will only be about $200 billion. So even without an increase in the debt limit, the Treasury Department will have more than enough revenue to cover its interest obligations and avoid a default.

Spooked by Uncertainty

That being said, financial markets are sometimes spooked by uncertainty. And since Treasury Secretary Timothy Geithner began making some irresponsible statements about the risks of default, there is growing interest in legislation by Senator Pat Toomey, a Republican of Pennsylvania, to alleviate the market’s fears.

Quite simply, Toomey’s bill would require the federal government to fulfill obligations to bondholders before making any other disbursements.

To the extent that investors actually are worried, Toomey’s legislation would remove ambiguity and, to borrow from the title of the bill, make clear that the “full faith and credit” of the U.S. government would be preserved.

via RealClearPolitics – Debt-Limit Remedy Gives Fiscal Hawks Leverage.

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