Debt Limit Explanation

I have tried to explain what is going on, but today economist Jared Bernstein has a more clear explanation:

"While waiting to go on Larry Kudlow’s show last night, I heard Sen Mitch McConnell say:

“What we have done, Larry, also is set a new template. In the future, any president, this one or another one, when they request us to raise the debt ceiling it will not be clean anymore. This is just the first step. This, we anticipate, will take us into 2013. Whoever the new president is, is probably going to be asking us to raise the debt ceiling again. Then we will go through the process again and see what we can continue to achieve in connection with these debt ceiling requests of presidents to get our financial house in order.”

This morning, on Squawk on the Street (CNBC) I debated former Sen Judd Gregg who wholeheartedly endorsed this process, calling it the best way to impose budget discipline.

Predictable, I guess, but let’s think about this for a sec. These politicians are essentially saying the following:

“We in Congress cannot be counted upon to come up with budgets that pay for the spending we authorize. Therefore, we will have to borrow to make up the difference. But if that borrowing hits the cap, we will not raise the cap to cover the appropriations on which we already signed off, unless we get the spending cuts we want.”

To understand how nonsensical Sens McConnell’s and Gregg’s position is, you have to appreciate that Congress knows when they pass their budget whether it will breach the debt ceiling or not, just like you know when you order your lunch whether you’ll be able to pay for it. They’re saying, I’m going to keep ordering lunches I can’t pay for and when the cashier hands me the check, I’ll hand it right back and tell her it’s her problem.

The budget process is when you square the ledger. Or not—there will be budgets, especially in recession, that add to the deficit and breach the ceiling. In such cases, Congress must borrow to make up the difference, and sometimes that will mean raising the ceiling, as we’ve done without incident since 1917.

But Sens McConnell and Gregg would rather pass budgets they knowingly refuse to pay for, and then threaten default. You can call that budget discipline if you want. But I’m telling you, this is not the way of great nations.

On the plus side, while I was waiting to go on Lawrence O’Donnell’s show, I heard Barney Frank, who, while even more disheveled than usual, made a whole ton of sense on the debt ceiling debate (he was a ‘no’ vote in the House)."