As the nation approached it's 31.4 trillion dollar debt limit, Steve Scalise (R-LA) House Majority Leader and leading figure in the "Freedom Caucus," stepped up to a bank of microphones and in 90 seconds demonstrated dangerous economic misunderstanding about borrowing and the debt. He asserted that the nation must stop borrowing money it does not have; it must live within its limits like a family with a credit card limit; and that somehow Joe Biden is the one responsible for the size of run-away deficits.
Because failure to raise the debt ceiling would cause a worldwide economic disaster, ceilings have always been raised, sometimes with 11th-hour deals. However, this time seems different: never before have such ignorant legislators, with such powerful anti-government reflexes, wielded such strong influence. Perhaps a fail-safe exists among the 18 republican members of Congress who won their elections narrowly in districts that Joe Biden carried in 2020. Perhaps enough of these members – – it would only take six – – could be persuaded to vote with the 212 democratic members to pass legislation to raise the debt ceiling.
It's About Time
Scalise exhibited no understanding of the debt ceiling, nor any understanding of the role of borrowing in a market economy. He announced that the country must stop spending money we don't have. This statement reflects a fundamental misunderstanding of what borrowing is! All borrowed money is money the borrower doesn't have; the lender has it. If the borrower is willing to pay the lender a price – – called interest – – for the privilege of using the lender's money for an agreed amount of time, then the borrower can spend that amount much earlier than would be possible without the loan. The "capital market" enables borrowers and lenders to create a mutually advantageous trade, e.g., when a borrower purchases a home or a car and the lender earns interest payments and the eventual return of the borrowed money. Borrowers borrow precisely because they don't have the money but do have an important investment opportunity.
Credit card balance limits are raised all the time
Scalise also sought an analogy in the limit on credit card balances as if they serve as immutable limits on consumer credit. They don't; credit card limits are raised regularly for the very important reason that lenders want to earn more within reasonable risk. When family incomes grow, the total credit available in the banking system can be increased, especially to borrow money for long-lived productive assets like houses, cars, and education. Such assets enhance borrower productivity and income, raising living standards as well as the ability to repay the loan.
Among all the advanced economies, often referred to as the Group of Seven, or "G7," the United States has the lowest post-pandemic inflation rate, the highest economic growth rate, the lowest unemployment rate, and a robust rate of innovation in such key areas as computer software and mRNA vaccines. Consequently, like the household that earns increases in its credit card limits, the United States government regularly demonstrates its credit worthiness around the world, as is reflected in the low-interest rate it is now paying in order to borrow; a condition that would be reversed should the US breach the debt ceiling.
To curtail spending, Scalise and the Freedom Caucus want to cut the "runaway spending" of the Biden administration, including the $1.7 trillion infrastructure spending over 10 years. However, borrowing to finance the building, maintenance, and repair of long-lived productive assets -- e.g., streets roads, sewer water, public buildings, ports harbors, bridges -- Home figure quit fucking around send it borrowing makes a great deal of sense. Such productive public assets will last a long time and when in good repair, they add to the national productivity, income, and wealth. It makes sense to borrow and let future generations help to repay the cost of the infrastructure as they use it.
Blaming Biden for Deficits while Ignoring Trump's much larger deficits. How convenient!
Contrary to Scalise's assertion, the Biden administration has brought the deficit down by a greater amount and faster than any administration in history. Of course, that is because Trump drove up the debt by a greater amount and faster than any administration in history. Trump added over $8 trillion to the national debt in just four years. Trump's pre-pandemic deficit was $3.1 Trillion for Fiscal Year 2020 (10/1/2019 to 9/30/2020; Federal Fiscal Years run from October 1 of the preceding calendar year to September 30). His final budget included his final deficit of $2.8 Trillion for FY 2021. The first Biden budget resulted in an FY 2022 deficit of only $118 Billion dollars, cutting it by more than half in just one fiscal year, just what the Freedom Caucus claims it wants.
William L. Holahan is Emeritus Professor and former Chair of Economics at the University of Wisconsin-Milwaukee.
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