Allan Blinder, You Are Simply Wrong

Posted by Jeff Carter
on January 15th, 2013

Professor Blinder writes an editorial today in the Wall Street articulating the false trade offs and the horror of not raising the debt ceiling. Oh my God, we might go into recession if we don’t raise the debt ceiling, increase spending and increase taxes.

Poppycock. Pure economic fiction. Bunk.

Blinder is wrong from the get go. The reason: He frames the economy through a lens where it revolves around the government. This is like critics of Galileo telling him he was nuts to say the solar system revolved around the sun. Blinder thinks the solar system revolves around the earth.

The headliners of Princeton’s economics department are bereft of any deep intellectual thought. Krugman? Blinder? They are hacks. Bernanke came from Princeton too. Princeton economic theology got us into this mess, it’s not going to get us out.

At current rates of spending and taxation, federal receipts cover less than 74% of federal outlays. So if the government hits the debt ceiling at full speed, total outlays—which includes everything from Social Security benefits to soldiers’ pay to interest on the national debt—will have to be trimmed by more than 26% immediately. That amounts to more than 6% of GDP, far more than the fiscal cliff we just avoided.

This doesn’t tell me that we have a tax problem. It does tell me the US has a growth problem and a spending problem. What does a business do when confronted with this problem? Sells off non-productive assets and cuts spending. What is Blinder’s solution? Raise the debt ceiling and increase spending. Combine that with Obama wanting another tax increase (he said as much yesterday) and you have just witnessed the left wing playbook for everything. Increase taxes, increase spending, increase the role of government and everything will be OK.

The what? You may have noticed that the hyperpartisan Congress has been unable to pass a budget for several years. Instead, it keeps funding government operations temporarily with a series of continuing resolutions that, essentially, maintain spending at current levels for a time. The continuing resolution now in force expires on March 27. After that, unless Congress passes another, the country faces a government shutdown of the sort it experienced in 1995-96. (Remember when the Grand Canyon closed?)

What happens then? By dint of his authority to protect life and property, the president would declare some government services (like air traffic control) essential and others (like the national parks) inessential. The latter would be closed down while the former would continue. No one knows precisely how much of the federal government would shut down. But when this happened in 1995-96, relatively few federal workers were deemed essential.

Professor Blinder may have forgotten. The US House of Representatives has passed a budget each and every year. The Democratically controlled Senate has not. This year, President Obama has failed to produce a budget. Last I checked, he was a Democrat.

The world will not end if we fail to raise the debt ceiling. Military will get paid. Social security checks will get mailed. Air traffic controllers will go to work. The US interest payments on the debt will get paid. What will happen is spending will rise less than it’s supposed to. Instead of a X% rise, it will rise by less than X%. The Congress might have to cut programs that it likes (includes both parties).

Professor Blinder makes straw men false choices in his editorial. What really matters is growth and the debt to GDP ratio. No or low growth with increasing debt to GDP is a recipe for economic disaster. We are going down that track faster than a bullet train.

US Total Debt as % of GDP data by YCharts

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.