The Debt Ceiling, Government Shutdown and Optics

In contemplating human transactions, the law of optics is reversed; we see the most indistinctly the objects which are close around us; we view them through the discoloured medium of our own prejudices and passions; the more familiar we are with them, the less truly do we estimate their real colours and dimensions.

– Richard Whately

We are currently in the midst of another government shutdown, which, in conjunction with the fast approaching debt limit, present plenty of discussion topics in early fall. With respect to the shutdown, the media has been in full blown crisis mode with its coverage, complete with pundits lamenting over the good old days. Like when President Reagan and Tip O’Neill were chums and bipartisanship was the way of the world. Except, of course, during the eight government shut downs that occurred during the Reagan administration. Of course one can point to the fact that they were different then, but every shutdown is different. Even prior to the Reagan shutdowns, President Carter went through several shutdowns, including five separate shutdowns revolving around abortion. This discrepancy between the actual goings on and the narrative highlights the issue of optics. The combined debt ceiling and government shutdown saga has allowed for the construction of the idea that the entire US economy is on the verge of collapse – all thanks to the Republicans. The following points help to shape the optics supporting that idea:

‘The Move to Shut Down the Government is Unprecedented in its Irresponsibility’

The narrative with respect to this shutdown, largely speaking, is that the Republicans in the House – the Tea Party in particular are being a bunch of children who are throwing a temper tantrum because they don’t like the legislation being passed. In fact the view is that it’s more pernicious than that, with opposition pundits and members of Congress accusing the Republicans of being terrorists holding the nation hostage with bombs strapped to their chests. This implication of the Republicans engaging in untoward or egregious tactics is out of order. A body of congress inducing a shutdown as part of negotiations isn’t unprecedented, as I wrote before it’s happened plenty of times over the last 40 years. Chris Matthews, speaking last Sunday attempted to differentiate this shut down from prior ones, stating:

Let me tell you this. They were issues of a day or two. They were issues of funding. Now, what I said before is, you can argue over numbers, and then you can — if it’s seven or nine, make it eight. But when you say we’re going to get rid of the number one program that you put into law and put in the history books, and your party’s been fighting for, for half a century, you can’t say, “Give me that.” That’s a non-negotiable stand. That’s the problem.

Matthews is wrong to make a distinction. This shutdown is also an issue of funding, specifically for Obamacare. The fact that it is the ‘number one program’ isn’t relevant. Consider the reason for the November 1981 and December 1982 shutdowns, as described in the Washington Post link from above. First 1981:

Reagan promised to veto any spending bill that didn’t include at least half of his proposed $8.4 billion in domestic budget cuts. The Senate passed a bill that met his specifications, but the House insisted on both greater defense cuts than Reagan wanted and pay raises for itself and for senior-level federal civil servants. Eventually, the House and Senate agreed to and passed a package that fell $2 billion short of the cuts Reagan wanted, so Reagan vetoed it and shut down the government.

And 1982:

House and Senate negotiators want to fund $5.4 billion and $1.2 billion, respectively, in public works spending to create jobs, but the Reagan administration threatened to veto any spending bill that included jobs money. The House also opposed funding the MX missile program, a major defense priority of Reagan’s.

As President Reagan in 1981, President Obama was not going to sign any spending bill that did not include 100% funding for Obamacare. Just as then, the House bill differed from the Presidents’ wishes, although unlike then the Senate and House did not come to an agreement. Again in 1982, the President was not going to sign any bill that included things he didn’t want, particularly funding for a major program which was an administration priority.

Interesting is the framing here – Reagan is the one who did the shutting in 1981, because he did not accept what Congress had put on his desk. This time around, the Republicans are seen as the ones doing the shutting – even though the Republican House has put forth spending bills. If blame was applied consistently, it would be the Senate and the President who are responsible for the shutdown, but that isn’t what the optics are.

The reason is a matter of scope. As Matthews suggests, Obamacare is a massive program, one that has been fought for across multiple generations. The weapons initiative that caused one of Reagan’s shutdowns seems fairly run of the mill in comparison. This difference in size doesn’t necessarily mean there is a difference in a legislative resistance to funding it. Let alone a ‘problem,’ or some sort of nefarious plot by Republicans to inflict evil on helpless people. It’s probably right that such a huge bill receives such strong scrutiny. The suggestion that such scrutiny is somehow underhanded in anyway, in light of the aforementioned historical discrepancies in apportioning blame, is just pandering to ideology and politics more than anything else.

Similarly, the debt ceiling has become such an important issue now as compared with years in the past because of scope. Rightly or wrongly, the current United States economic model depends on a continuing expansion of debt to operate. That fact means that anything standing in the way of continual expansion of debt is problematic. This reliance on ever increasing debt is something I’ve written about before in more detail, so I won’t expand too much here. Its relevance here is that it has become the underlying base of the framing of the debt ceiling debate, although it hasn’t been explicitly discussed. What has been discussed across the board is what a failure to raise the debt ceiling means.

‘The Failure to Increase the Debt Ceiling is A Default on the Debt Obligations of the United States’

The word ‘default’ has been used pretty recklessly during this saga, with everyone from the President, lawmakers, to TV pundits talking about how the failure to raise the debt ceiling would essentially be tantamount to default. This is wrong. The debt limit caps the amount of debt the US government can accrue. A failure to raise the debt limit merely means the total debt remains steady at that limit. A default, in the realm of repayment of that existing debt is simply a failure to make interest payments according to schedule and the principal at the end of the loan agreement. According to the Treasury, the interest expense for Fiscal Year 2013 came in at just under $416 billion. With revenues in excess of $2.5 trillion, there is no concern over the ability to pay the interest on the debt. When it comes to principal payments that come due, the debt ceiling does not prevent the Treasury from continually rolling over those debts that do come due since their rolling over would not increase the total amount of debt in existence. Thus there would be no default, in the manner in which many are describing, such that the rating, let alone legitimacy of US Treasuries would be called into question.

‘The Failure to Increase the Debt Ceiling is a failure to ‘pay our bills”

The link between increasing the debt limit and payments of bills is an interesting one, the implications of which have not been discussed in any real way thus far. From this CNN article:

If lawmakers don’t raise the limit on federal borrowing soon, they will put the nation at risk of defaulting on some of its legal obligations.

…which include interest on the debt, Social Security payments, and payments to federal contractors.

There is a difference between interest payments, and the other payments such as Social Security and payments to contractors. With respect to ‘paying bills,’ paying the interest is the only thing that credibly falls under that banner. That interest is on debts already incurred. Social Security payments, payments to contractors, and virtually all other spending are payments that have been promised. Failing to raise the debt ceiling would mean failure to meet some of the promised payments made, and while that would be problematic in one sense, there would be no ‘default’ in a technical sense, meaning the concomitant issues of broad based collapse in the Treasury market is unlikely.

Why the Debt Ceiling Exists in the First Place and the Consequences of Continually Raising It

From this report about the history of the debt limit, the reason it exists is the following:

The debt limit also provides Congress with the strings to control the federal purse, allowing Congress to assert its constitutional prerogatives to control spending. The debt limit also imposes a form of fiscal accountability, which compels Congress and the President to take visible action to allow further federal borrowing when the federal government spends more than it collects in revenues. In the words of one author, the debt limit “expresses a national devotion to the idea of thrift and to economical management of the fiscal affairs of the government.”

There are two interesting points to make here. The first is that the real consequence of a failure to increase the debt limit is the almost instant balancing of the budget. Without the ability to take on more debt, the Federal Government would be limited to spending what it collected in taxes, and will be forced to cut proposed spending massively. In truth, there would be other revenue boosting measures available, such as selling assets, but these pale in comparison to being able to increase the level of debt. The need to increase debt arises from the fact that proposed spending is not covered by the revenue brought in. This implies that the spending that the government wants to do is not necessarily backed by the willingness of the people to fund it. Congress, representing that will of the people (in theory), is only afforded a certain level of debt up to which it can accrue to cover this difference between what it wants to spend and what it can raise in revenues.

This brings us to the optical nature of the debt ceiling itself. The existence of a debt ceiling, according to the paper, conveys a sense of accountability and economical management of the governments’ finances. Constantly raising the debt ceiling every time it is reached is to merely render the idea of fiscal accountability and economical management of finances an illusion. Furthermore, the insistence that all hell would break loose if the debt ceiling isn’t increased means that it will never be increased. The same song was sung in the 2011 edition of the debt ceiling crisis. If it was true then and it is true now, it will be true the next time the debt ceiling is reached (assuming an agreement is made to avert the current situation).

Simply stated, if a constantly increasing debt is what is needed to avert crisis as is asserted, then crisis is inevitable. This is because the condition for ‘survival’, a constantly increasing debt, cannot persist indefinitely. This will be news to some of a certain persuasion, but there are limits to the amount one can borrow, regardless of whether or not you are the greatest economic power the world has ever seen. Should that time come, Federal Reserve and their ability to create money to buy all of the debt isn’t a solution either. That simply introduces the certainty of a currency crisis into the equation.

On the Optics of ‘Voluntary’ vs ‘Involuntary’ Crises

As written above, the fact that the US economy is so structurally dependent on constant increases in debt means any failure to increase debt becomes a blow to that particular structure. Thus should the debt ceiling not be raised, it is pretty clear that there will be an immediate downturn in the economy. This ‘voluntary’ crisis, brought about by not increasing the debt and thus denying promised payments, would not play well with the public. With respect to the ideas of more libertarian, free market oriented people, this would deal a very serious blow to their ideas. Recall that the narrative is that the Tea Party – essentially a group most Americans describe as libertarians and free market proponents – are behind the current shut down and debt ceiling impasse. Any downturn in the fortunes of the economy would fall squarely on their shoulders, at least optically speaking.

Before continuing, I must stress that the current economic structure of constant increases in debt to support spending and consumption is not an economic model that can last in the long term. I’ve expanded upon why a few times, as I’ve mentioned above. A dismantling of that economic structure would not be a bad thing if long term, sustained economic growth is the desired goal. The issue is how the transition from a debt-dependent-boom-bust economy to a longer term savings and production based economy would be viewed by the general public. Because this transition almost certainly involves some sort of crisis, as the debt dependent paradigm implodes, the way the next economy is shaped will depend on how the crisis is perceived. Yet more optics.

Should the crisis come about in ‘voluntary’ form based on the failure to increase the debt limit or something similar, the existence of crisis and potential hardship in the short term will supersede any of the longer term benefits in the view of most people. I believe that there will be a severe negative reaction towards Republicans, especially Tea Partiers, and anyone who has sympathy with the views of free market economics. It will be the fault of the ‘free market ideology’ that landed the country in crisis yet again, and surely subsequent elections will usher in politicians and movements in a direction opposite to free markets.

The ‘involuntary’ crisis happens if the debt ceiling is raised, and is continued to be raised, skirmishes notwithstanding. As I described above, the probability that the US can constantly increase its debt for the rest of time is zero. At some point, it will no longer be able to borrow, and enlisting the Federal Reserve to take over, explicitly monetizing the debt, would represent the last straw. In that event, there would be no conclusion to draw other than the continued proliferation of debt resulted in crisis. From there, a hard look would have to be taken at the policies and ideology that induced taking on so much debt. While that process leaves plenty of room for error, it is much more likely that the general public begins to lean towards a more free market solution than in the voluntary case.


For the record, I do believe that there will be an agreement to raise the debt ceiling. I believe this for the simple fact that the Republicans, while adorning the label of ‘the free market party’ are in reality far, far from deserving such a label. Political expedience and adhering to the line of least resistance will impel them to agree to raise the debt ceiling. With respect to Obamacare, for the sake of optics it is probably better that a deal is agreed there as well, with full funding for Obamacare. If the bill is fully funded and it collapses under its own weight, the problem will be there for all to see. In meddling with it however, a very easy argument is afforded the Democrats should it then falter – namely that it would have worked unencumbered, therefore government must move to increase its role in health insurance.

It is all a matter of optics.


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