News organizations tend to report on the debt ceiling negotiations as if reducing the deficit is the main concern for both parties. Unfortunately that is not really the case. I say unfortunately because if Democrats and Republicans had the same overall goal, it would be much easier to get a deal done (and as previously discussed, a deal to raise the debt ceiling is absolutely necessary).

If reducing the deficit as much as possible was the goal of both parties, a deal could be struck in which spending cuts that Republicans covet would be traded for revenue raisers (tax increases, elimination of tax breaks, etc) that Democrats desire. The resulting deal would reduce the deficit by a certain amount and both sides would declare victory. This is the type of deal Reagan and Clinton enacted to reduce the deficit and it’s similar to what I expected to happen in this case.

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Instead of taking on a new topic this week, I’m going to post a few quick follow up items to two of my last posts as well as a couple links to articles I found interesting or noteworthy.

Follow up items:

• In last week’s post on contradictions in the debt ceiling negotiations, I stated that the negotiations were progressing better than they might appear and that it was likely Republicans would eventually agree to increased taxes via the elimination of tax breaks. Then, on Thursday, Congressional Republicans pulled out of the debt ceiling negotiations over the issue of taxes.
  

  Whoops! It is now likely that President Obama will have to hammer out a deal directly with Speaker Boehner. While it is still possible that the final deal will include the elimination of tax breaks, I’m less confident than I was last week. This is due to the fact that Republicans have hardened their rhetoric around tax cuts and Democrats have seemed increasingly focused on getting additional economic stimulus (in the form of an employer payroll tax cut) into the final deal.

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If you are following the debt ceiling talks (and really, who isn’t?) you might get the impression that things are at a complete stalemate. Republican leaders continue to insist that entitlement cuts are necessary for a deal to be made and Democratic leaders are equally insistent that they will not agree to significant Social Security or Medicare cuts. Similarly, Democratic leaders believe that tax revenue increases must be part of any deal but Republicans argue they will not agree to any tax increases. Despite these seemingly contradictory stances, word from DC is that these talks are proceeding nicely and a final deal is slowly taking shape. How is this possible?

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What is the debt ceiling?

The debt ceiling is the legal limit on how much the US government is allowed to borrow.

Why does it exist?

The debt ceiling was originally created to make life easier for congress, not harder. Up until WWI, when the US government needed to borrow money, congress would debate and approve the terms of sale for treasury bonds themselves. During WWI, this proved to be too time-consuming so congress delegated these activities to the Treasury Department.

Not wanting to cede too much power, congress also voted to set a limit on how much the Treasury Department could borrow.

What doesn’t the debt ceiling do?

The debt ceiling itself does not set spending or revenue levels. That is done through the budget process.

But doesn’t spending and revenue levels dictate how much the US government has to borrow?

Therein lies the problem with the debt ceiling. Congress knows how much debt will be incurred when they pass the annual budget. If they didn’t want the Treasury Department to borrow more funds, they would pass a budget that didn’t require the Treasury Department to do so.

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