Wednesday evening the bipartisan negotiations on raising the debt ceiling collapsed when House Majority Eric Cantor (R-VA) announced he was pulling out of the talks. Cantor refused to continue the talks as long as tax increases were on the table as a way to reduce the deficit, even though taxes in the U.S. are already low compared to other countries and by historical standards.
Just about all the major players agree that a deal should and will be made. In fact, Cantor’s walkout was planned well in advance as a way to force Obama to get involved in the negotiations. As John Dickerson explains, the breakdown in talks is simply a piece of staged political theater designed to demonstrate to the base of each party that their representatives are taking as hard a line in negotiations as possible. Failure to raise the debt ceiling before it isreached at the beginning of August would force the U.S. to default on its debt. That would make it difficult for the U.S. to continue borrowing money and dramatically weaken the U.S.’ economic position in the world. As Treasury Secretary Timothy Geithner wrote in a letter to Congress earlier this year, even a temporary default could cause “catastrophic damage to the economy, potentially much more harmful than the effects of the financial crisis of 2008 and 2009.”
But why exactly are we even flirting with default? The conventional explanation is that the U.S. is facing a serious long-term budget problem. It’s true that the national debt is high and that the current levels of deficit spending are unsustainable in the long-term. As I have argued before, however, the problem is not that the U.S. can’t pay its debts, but that we don’t want to pay them. We refuse to cut either Medicare or military spending, but we won’t raise enough taxes to pay for those programs either.
In fact, according the Congressional Budget Office, if Congress just does nothing at all—which means letting the Bush tax cuts expire as they are currently scheduled to do—the budget deficit will disappear on its own by the middle of the decade. That doesn’t actually mean there is no budget issue at all, since doing nothing would also mean not passing another “doc fix” making sure Medicare is properly funded. But even if you take into account the money that we will need to spend on Medicare but haven’t yet budgeted, deficits would stilll shrink to around 2% of GDP—which is a sustainable level, as Josh Barro explains—if we allow the Bush tax cuts to expire. In other words, if we were simply willing to pay as much in taxes as we did during the Clinton administration, the budget crisis would essentially disappear.