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The Tea Party and the Debt Ceiling vs. Economic Growth

Tuesday, December 18, 2012

By focusing on the debt limit, Tea Partiers are wasting valuable time on the wrong issue. What matters most is the size of our economy. We should be focusing on economic growth, not the debt ceiling number.

The Tea Party faction of Republicans is not a bashful bunch. Arguably misguided, but definitely not bashful.

In 1773, participants in the Boston Tea Party disguised themselves as Mohawks, then made their point to the British crown by throwing cargo overboard ships. Today, 240 years later, the Tea Party Republicans are taking a modified approach: they aren't using disguises, and they are making their point to the Obama administration by threatening to sink the ship.

Rep. Louie Gohmert (R-TX), a member of the Tea Party Caucus, provided a recent example in an interview about the fiscal cliff: "As far as… the weapon we have, it’s the debt ceiling." In other words, refusing to raise the debt ceiling is the Tea Party’s threat. Actually following through on that threat would be the political equivalent of detonating a suicide vest (as I said previously in “How to Fix the Debt Ceiling”). Rep. Gohmert and the Tea Party Caucus aren't alone; ominously, Senators McConnell and Corker have recently picked up on the debt-ceiling-as-leverage theme. 

In his interview, Rep. Gohmert did hit on an all-important point: "Some would say, if the dollar were not the international currency, we would have already been Greece." That is true, and it has vital implications, primarily this: we are fortunate that the dollar IS the international reserve currency, and that's why we're NOT Greece.

The "dollar economy" stretches far beyond our political borders. That’s a consequence of our economy’s strong track record, and it’s a big reason U.S. Treasury securities are in high demand — which, in turn, is the reason the real interest rate on our skyrocketing federal debt is near-zero. The world loves to invest in our sovereign debt instruments — for now, anyway — and is giving us some extra runway to get our sagging economy back on track. Therefore, if we want to remain "not-Greece," we need to protect the lofty international status of our dollar and our sovereign debt.

The surest way to protect the status of our dollar and our sovereign debt is to grow our economy at least as fast as our debt grows. Conversely, the surest way to become "Greece 2.0" would be to detonate our suicide vest — i.e., to default on our Treasury securities after refusing to raise the debt ceiling. Default could destroy the most valuable brand name in the world — the "U.S. dollar"— and, ironically, that destruction would be self-inflicted.

Having a fixed-dollar debt ceiling, on top of our spending laws and tax laws, is like having a redundant, nonsensical law stipulating that 'five minus three must equal zero.'

Even more ironic: the debt ceiling serves virtually no financial purpose. The two meaningful numbers are (1) the size of the debt itself (not the ceiling), and (2) the size of the economy. Figure 1 shows the recent history of those two key numbers, as well as the near-meaningless debt ceiling. The bigger the economy, the more debt we can sustain, as Warren Buffett has noted. When the economy grows faster than the debt, the debt burden decreases. (We reminisce fondly about the late-1990s economy precisely because that's what was happening at the time.) Conversely, when debt grows faster than the economy does, the debt burden increases; unfortunately, that’s what is happening today.

But notice the "debt ceiling" (dotted line); it hasn't kept the debt from rising. It’s the other way around: it has been rising to make room for rising debt in a growing economy. Unlike the actual size of the economy (blue line) or the actual total of our outstanding Treasury obligations (red line), the debt ceiling is just a number on paper, chosen by the same politicians who, with their power of the purse, created the tax laws and the spending laws that help determine how our economy, our tax receipts, and our federal debt grow. Having a fixed-dollar debt ceiling, on top of our spending laws and tax laws, is like having a redundant, nonsensical law stipulating that "five minus three must equal zero."

Figure 1

conover121712_FC

Size matters: the size of the economy (GDP), not the debt limit, is what makes the difference.

By focusing on the debt limit, the Tea Party Republicans are wasting valuable time on the wrong issue. What matters most is not the debt limit, but the size of our economy. We should be focusing on economic growth, not on a made-up, near-meaningless debt ceiling number.

The Proper Debate: How Best to Grow the Economy

Instead of political grandstanding around a redundant, made-up number, we should spend that valuable time debating how best to achieve robust growth given our current economic condition. The proper debate would be lively. Contemporary Keynesians advocate top-down, "intelligent design" economics — i.e., trusting government officials, regulations, and spending to foster higher consumer demand for familiar goods, services, and job skills. The Reagan Republicans, on the other hand, advocate evolutionary economics (a.k.a. “complexity” and “emergence”): enabling and trusting the private sector to evolve in favorable new directions through innovation of better goods and services, which require more-advanced job skills.

There are better ways to limit the size of government than a frontal assault with a suicide vest.

The growth debate is not just a healthy one, it's crucial to our future. But we can't have a proper debate about growth if the Tea Party faction succeeds in preempting it by diverting attention to the near-meaningless debt ceiling simply because it’s a convenient political weapon.

Fixing our sputtering economy requires us to shift the debate toward the best way to grow and prosper. Republicans, whether they know it or not, have the winning growth argument, and should therefore be pushing directly for that debate. Our economic track record tells us that the prosperity we need would come from a real growth rate of 3.5 percent or more, not from the tax-hike-spending-cut stalemate now being flogged ad nauseam. Using the meaningless debt ceiling as a weapon to extort long-run entitlement cuts is at best a costly diversion; at worst, it’s economic suicide. The Tea Party Republicans mention growth only occasionally, in vague, general terms; they would do much better to shift their focus directly to growth — Hayekian/Schumpeterian growth through trust in the organic, evolving, adapting private sector, as opposed to Keynesian growth through trust in government’s "intelligent designers.”

If a noble goal is to limit the size of government, it's time to admit something military generals have known for millennia: the frontal assault is costly, frequently fatal, and typically inferior to the indirect approach. Sequestration, for example, is a frontal assault on government’s size; it not only cuts fat, meat, and bone indiscriminately, but also alienates the politicians responsible for the slaughter. A jump-start of private sector growth, on the other hand, would be an indirect approach — an alternative method of shrinking government to a significantly smaller share of the economy. There are better ways to limit the size of government than a frontal assault with a suicide vest.

As Steve Forbes correctly said back when he was a presidential candidate: "You can't cut your way to prosperity, you've got to grow the economy." A corollary, for the Tea Party: you can’t default your way to prosperity, either.

Steve Conover retired recently from a 35-year career in corporate America. He has a BS in engineering, an MBA in finance, and a PhD in political economy. His website is www.optimist123.com.

FURTHER READING: Conover also writes “The Left’s Flip-Flop on the Bush Tax Cuts,” “How to Fix the Debt Ceiling (A Bigger Threat Than the Fiscal Cliff),” and “Understanding Romney’s Approach to Taxes: ‘Lower the Rates, Broaden the Base.’” John H. Makin says “Trillion-Dollar Deficits Are Sustainable for Now, Unfortunately.” Marc A. Thiessen reports that “In 'Cliff' Talks, Obama is on the Brink of Disaster.” John Steele Gordon discusses “Debt and the Constitution.”

Image by Dianna Ingram / Bergman Group

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