Advancing a Free Society

Short and Long Term United States Fiscal Crises

Monday, July 18, 2011

The US faces a rather easy to manage short run fiscal crisis, and very challenging long-term fiscal and growth problems. The short-term crisis is due to the rapid growth of federal debt outstanding that will soon hit the ceiling set by Congress. I have no doubt that Congress will, and should, vote to raise the ceiling. The only major uncertainty about this is whether that will be tied to presidential and congressional actions to try to reduce the long-term fiscal crisis.

That Congress will have to raise the debt limit this summer is a no-brainer since revenues are not anywhere near large enough to cover government spending. Without a boost in the ceiling, the federal government will be unable to pay its bills, including pay to federal employees. Since both Republicans and Democrats know that, and since Republicans are likely to be blamed if the ceiling is not raised and the federal government “shuts down”, congressional Republicans cannot credibly threaten not to agree to raising the ceiling. This is true even if they do not receive major concession on government spending from President Obama and congressional Democrats. Since many House Republicans oppose voting for substantial new taxes in order to gain Democratic support for spending reductions, prospects for an agreement before the debt-ceiling deadline on spending cuts and revenue increases are not good. Therefore, the best approach at present for Democrats and Republicans is to agree to an increase in the ceiling, and then afterwards try to work on a serious plan to meet the long-term spending-taxes-growth challenge.

Continue reading Gary Becker at The Becker-Posner Blog

(photo credit: Thomas Pauly)