Debt Ceiling Talks: The Scale of the Problem

We are less than a week away from hitting the debt ceiling, and there does not appear to be a bargain in sight. If both Houses of Congress and the White House do not get their act together, the US government will be limited in spending only what it receives in tax revenue. The result will be an immediate 40% cut in Federal spending.

I don’t think there has been enough said about that 40%. Congress has authorized spending for almost twice as much as they take in. Twice as much. The idea that we are going to close that gap, either by shutting down the national parks, NPR, and the State Department, as the right wishes, or by making the people in the top 10% of incomes pay another 4% of their income in taxes, as the left envisions, is ludicrous.

To close the gap on the revenue side would require the government to increase taxes by 67%. Since the top 5% of income earners pay 59% of total income tax, if you wanted to close the gap solely from that group, their taxes would have to double to about a 80% marginal rate. We would be telling people “if household income exceeds $200,000, 80 cents out of every extra dollar you earn is going to be taken away. If we did that, who would be left to contribute to politician’s reelection campaigns?

On the expense side of the equation, you would have to make huge cuts in the defense budget, along with eliminating all other discretionary spending to close the gap. No Federal prisons. No air travel, because no air traffic controllers. No repairs to the Interstate system. Nada.

Or, you could stop paying Medicare. Medicare accounts for about 40% of current Federal spending. Interestingly, most of the commentators I have been reading have assumed that Medicare spending would be a priority in the event the debt ceiling is reached, right after interest payments on the debt. But that topic is the subject of another post.

Another interesting thing about the current crisis is that it is completely made up. Created out of whole cloth. The debt ceiling has been raised 78 times in the last 50 years. It is simply a matter of Congress giving the Treasury Department permission to go out and dig the hole a little deeper. Congress could come back from lunch this afternoon and raise the debt ceiling on a voice vote. It is, as they say, merely a stroke of the pen.

The Republicans started the crisis going by declaring that the debt limit wasn’t going to go any higher until a deal was reached on spending cuts. Big spending cuts. The President then doubled down by threatening to veto any increase in the debt ceiling that didn’t include a “Grand Bargain” on spending cuts and revenue increases. The revenue increases to start right away, the spending cuts to take place sometime in the future. Preferably after the next election, when he is settling into his second term. Both sides think they can win the political game by being intransigent, and here we are.

At this point, there is not enough time left to put together major legislation on either spending cuts or revenue increases. This means that the most likely scenario is that at the eleventh hour both sides will toss in the towel and agree to increase the debt ceiling enough to get through the rest of this year, and part of next.

That only takes a stroke of the pen.

The Debt Ceiling: What happens if we hit?

We’re getting closer to our self imposed limit on the national credit card. The current debt limit is around $14 trillion. According to pronouncements from the Treasury, the government is spending money so fast that we are going to hit that limit on August 2, about two weeks away. As things stand now, neither side of the negotiations on the budget is giving way.

Once we lose the ability to continue tacking on more debt to the debt we already have, the US will default on its debt for the first time in the history of the country. The financial Apocalypse will have arrived.

Sort of. Because many people in this country have hit their individual debt limits. It’s called getting your credit card refused, or being denied for refinancing. But for a lot of those individuals, maybe most of them, being unable to dig the hole deeper doesn’t in and of itself require a default.

After all, it’s not as if the government is not still taking in tax revenues. My employer will continue tax withholding. Self employed individuals will continue making quarterly estimated tax payments. There isn’t going to be a complete shutdown of the Federal government. What there will be is a partial shutdown of the Federal government and Federal transfer payments.

One thing for sure is that the top priority for the money coming in is to continue making interest payments on existing government bonds. After all, if you stop making interest payments, the lenders won’t be too keen on loaning you more money after the debt ceiling problem is straightened out. Actually, the government will continue to sell bonds even without an increase in the debt ceiling. The money taken in from those bond sales will be used to pay off older bonds that are coming due. So first demand on the revenue will be to the bondholders.

Now, if you are making interest payments and paying off maturing bonds, I’m not even sure you can call it a default at all.

On the other hand, the Federal government is currently spending 40% more than it is taking in. Hitting the debt ceiling may not cause a default, but the immediate cuts required would entail huge disruptions to the economy. Either way, I’m not anxious to try it.

Migrant Labor as Skilled Labor

The inestimable Megan McArdle has a post on her blog over at The Atlantic where she argues that the work performed by illegal migrant workers requires more skill than we Anglos normally give credit for. Specifically, she writes about her experience at a pick-your-own raspberry farm. She noticed that a lot of the fruit was either missed or wasted, combined that with the aches and pains she felt for days afterward, and voila, picking fruit takes more skill than you realize.

Ordinarily I see Megan's point in everything she writes, and I agree with almost all of it. In this case, however, I believe the pain in her hamstrings has influenced her judgment. By her own admission, purple raspberries are an obscure, not widely grown fruit, which is more difficult to harvest than other varieties. That's probably why so few farmers grow them.

Even so, she lists only five rules for picking the fruit:

1. Get low to the ground.

2. Look under the leaves.

3. Go around to the back side of the bush.

4. A GO condition for the color--it must be purpler than some value of red, or it will be unripe.

5. A NOGO condition for gloss--the fruit cannot be too matte, or dull colored, because that means it is overripe and will mold.

By working with a skilled trainer, a sufficiently motivated trainee could learn these distinctions within about 500 iterations of the task. "That one is too dull. That one is too red. You forgot to look under all the leaves." That is a single basket of fruit. By sufficiently motivated I mean that is you cannot learn to get all of the acceptable fruit, and only the acceptable fruit off a bush, within a couple of hours, we fire you and you go back to unemployment. Once these quality control tasks are learned, the remainder of the job consists of physical conditioning and coming up to standard speed.

One week, or at most two, would be sufficient to master this job. Maybe a couple more weeks for other crops. This means the first farmer to hire an inexperienced picker suffers the losses during the learning curve, but the other farmers in the picking season will benefit thereby.

In my factory, it takes about a month to get signed off at the entry level machine operator position. With the current level of unemployment in our area, we are having no problem filling positions at a starting rate of $8/hour.

All labor is honorable, and some jobs are a lot tougher than others, but picking fruit is still unskilled labor.