The debt ceiling debate: It's about 2012 - WMC Action News 5 - Memphis, Tennessee

The debt ceiling debate: It's about 2012

WASHINGTON (RNN) - The entire nation and economic markets worldwide have their eyes trained on one day: Aug. 2.

That's when the U.S. government will hit its borrowing limit and face a default if the federal debt ceiling is not raised.

Despite weeks of negations, Democrats and Republicans have been unable to broker a compromise to prevent a potentially chaotic outcome. Speaker of the House John Boehner, R-OH, an adept negotiator, has walked out of negotiations twice already.

That's because for members of Congress and the White House, the outcome of something very precious is at stake: Raising the debt ceiling could have a decisive impact on 2012 elections.

"This debate is not about economics," said Dr. Keivan Deravi, a noted economist at Auburn University Montgomery. "It's about political ideology."

A little like your credit card

Deravi compared the nation's debt ceiling to a credit card.

Every credit card has a spending limit. Once that limit is reached, the card maxes out, and nothing more can be charged. If you want to raise your limit, you have to call your creditor and ask for permission.

Governments also spend money they don't have. The U.S. has "hit" its $14.2 trillion debt limit, which can now only be raised by Congress' approval.

The limit has been reached thanks to two wars, government bailouts, tax cuts and four or five years of out-of-control spending.

Now, the debt ceiling has to be raised to pay back the money we borrowed to fund these initiatives.

"People don't understand this is nothing about the future," Deravi said. "This is about now."

If Congress doesn't take action

If Congress fails to raise the debt ceiling, the president will be left with two choices, both of which have bleak outcomes.

President Barack Obama would have to choose between honoring the nation's obligations or defaulting, saidHarvard University economist Benjamin Friedman.

Honoring the debt would be an acknowledgement that there is not enough money to pay for current government spending. All federal spending would need to immediately be cut by 40 percent.

"In that case, the question is, what would we cut back?" Friedman asked. "The simplest thing to do would be to instruct the check-writing agency to reduce every check it writes by 40 percent," he said.

That could have a tremendous impact on American citizens who depend on benefits like Social Security.

The lucky ones would be able to use their savings to help balance their spending.

"A lot would have to cut back quite sharply on their spending," Friedman said.

Reduced spending slows market demand, which in turn has a huge impact on hiring. Layoffs would likely occur in this situation.

What if the president instead chose to default?

"That could potentially be chaos," Friedman said.

One thing's for sure. As the national debt makes headlines, the U.S. is not yet on a path toward a sustainable relationship between its debt and the size of its economy, Friedman said.

Another perspective

Deravi argues that the default option is legally non-existent.

"It is a really ugly, and a really unrecognizable option," he said.

Legal experts, and even former President Bill Clinton, have said that Obama can prevent the government from defaulting through an obscure clause in the U.S. Constitution.

According to the 14th Amendment, the "validity" of the of the government's debt cannot be questioned.

This would compel the president to pay interest on previously accumulated debt.

In order to do so, the president would have to cut spending by $125 billion per month, Deravi said.

But the president can only cut spending where he is authorized to do so. Defense, Medicaid and student loans would likely be targets.

This would raise the probably of a recession "very, very high," Deravi said. "More than anything else, it's going to have  a psychological impact."

It boils down to 2012

Some Tea Party politicians, such as Michele Bachmann, R-MN, have called for spending cuts without raising the debt ceiling.

"We have a very large part of our economy - 10 percent - is funded by direct government spending," Friedman said.

Friedman said that if we cut back very rapidly, some folks will lose their jobs.

The alternative would be to lower spending over time, something Friedman said most economists agree with.

But freshman Tea Party candidates were voted into office based on their economic ideas. They promised to get federal spending under control.

"If they don't deliver, they'll be in trouble," Deravi said. "Their election cycle is 2012."

And so, many Republicans are pushing back against their own party's fixes to the debt ceiling.

And the Democrats are no different. Republicans want to raise the debt ceiling a small amount and revisit the issue in 2012, which also happens to be an election year.

"I believe (Obama) views this as a distraction for next year," Deravi said.

And so a new and so-called bipartisan plan proposed by Senate Majority Leader Harry Reid, D-NV, gives in to many Republican demands.

But it has one major difference: It schedules the debt ceiling renegotiation for 2013 - after the presidential election has been decided.

The president wants to secure his job, Deravi said. Pushing aside the debt ceiling would avoid an ideological economic debate and bring greater scrutiny to the individual candidate.

And so, a partisan war has come to wrap itself around the debt ceiling.

"When you mix politics and economics, you get an ugly commodity," Deravi said.

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