President Obama’s Spin on the Debt Limit

President Obama keeps spinning the debt “crisis”. I’m disappointed the media does not call out his mischaracterizations.

He spoke this morning and there are so many examples. [Update - Here's the transcript]

He said that losing our AAA rating would increase interest rates and that would be a tax increase. No Mr. President, an increase in interest rates is not a tax increase. Nice rhetoric, but not accurate. With a tax increase, everyone pays more (at least those who pay taxes), and the money goes to the government. With an interest rate increase those who borrow money at the higher rates pay more. But those who have already borrowed (such as fixed-rate mortgages) see no increase. And the money doesn’t go to the government. It goes to those who lend money at the higher rates, and they make more money.

More important, it is far from certain that a downgrade resulting from this would increase rates. A lower rating might reduce demand for our bonds. But not increasing the debt limit would reduce the supply of our bonds. That reduction in the supply of our bonds would increase their price – or in other words, lower the effective interest rate. Since the reduction in supply is a certainty and the reduction in demand is only a possibility, the supply effect will probably outweigh the demand effect.

The President frequently says that not raising the debt limit would mean we would not be able to pay our creditors, social security checks, thousands of government contractors, etc. Really? There are reports that the Treasury Department has a contingency plan already.

The big question the media should ask Obama is which payments he would prioritize. Is he saying that seniors are the first ones not to get paid? He keeps mentioning them in his speeches. No, what he is really doing is trying to scare seniors because they are a huge and important voting bloc.

Another spin move is a somewhat common twist that tax cuts are spending. From Obama’s July 25th speech: “In the year 2000, the government had a budget surplus. But instead of using it to pay off our debt, the money was spent on trillions of dollars in new tax cuts ….”

Tax cuts are not spending Mr. President. Maybe your base believes it, but the rest of us know better.

Another common spin is that the wealthy and the corporations don’t pay taxes. From that recent speech: “The only reason this balanced approach isn’t on its way to becoming law right now is because a significant number of Republicans in Congress are insisting on a different approach … that doesn’t ask the wealthiest Americans or biggest corporations to contribute anything at all.”

Wealthy people and corporations do pay taxes. Corporate tax is, first of all, double taxation. First the corporation pays taxes on its profits. Then the shareholders pay taxes again on the dividends and/or capital gains. The same income is taxed twice. And the wealthy pay a huge share of the taxes. So the wealthy and the big corporations do contribute. It’s not that they don’t contribute anything. It’s that President Obama wants them to pay even more than the huge amount they already pay.

Today he made a comment that increasing the debt limit does not reduce our spending. Really? If you don’t write the social security checks, then that’s money you’re not spending. If you don’t pay those contractors, again, that’s money not spent. And if you don’t pay the contractors, they might refuse to do more work, which would save even more money. Similar to double taxation, the President is doubling up on the impact of this.

Yet another myth is the Washington version of spending cuts. For the President, and for establishment Republicans like John McCain, a reduction in planned increases is a cut, even if it means you spend more this year than you did last year. For the rest of us, a cut is when you spend less this year than you spent last year.

Rand Paul talked about this yesterday in an interview with Judge Napolitano (the key moment is about 2 minutes in):

The biggest problem with President Obama’s take on all this is that there is “a significant number of Republicans in Congress” who he says refuse to compromise. What he wants is for them to come around to the continued growth of government. How does a small government conservative compromise on that? We believe in smaller government. Increasing the debt limit enables the continued growth of government.

Where does the President stand on spending cuts? Is there anything in the federal government he would agree to eliminate? Do we really need a Department of Commerce, or Agriculture, or Education?

The debt limit is not a ceiling. It is the floor of the hole we’ve dug ourselves into. If we increase the limit, we dig the hole even deeper. By refusing to increase the limit, our “Tea Party” Republicans in Congress have finally recognized it’s time to stop digging ourselves deeper into debt. I congratulate them and hope they stand firm.

[Update: Now that I have the transcript, here's more analysis]

“What’s clear now is that any solution to avoid default must be bipartisan.”

Um … the Senate is majority Democrat. The House is majority Republican. The need for bipartisan deals has been there since the last election.

“We need to reach a compromise by Tuesday so that our country will have the ability to pay its bills on time, as we always have — bills that include monthly Social Security checks, veterans’ benefits and the government contracts we’ve signed with thousands of businesses.”

Interesting that Social Security checks and veterans’ benefits are the first on his list. Very important to scare the prime voters.

“[A] lower credit rating would result potentially in a tax increase on everyone in the form of higher interest rates on their mortgages, their car loans, their credit cards.”

No. A lower credit rating for the federal government could result in higher rates for government borrowing. Why would it affect my mortgage rate? If the government is perceived as a less reliable borrower, then lenders will be more willing to lend to other borrowers, like me. And as I mentioned above, I have a fixed-rate mortgage. Changes in rates now will not affect my mortgage. Credit card rates? Anyone who is fiscally responsible avoids borrowing on credit cards. Car loans? The car companies are desperate to sell and find ways to subsidize rates on those loans.

“It’s not a vote that allows Congress to spend more money. Raising the debt ceiling simply gives our country the ability to pay the bills that Congress has already racked up. I want to emphasize that. The debt ceiling does not determine how much more money we can spend, it simply authorizes us to pay the bills we already have racked up.”

This is huge spin. By not raising the debt ceiling, the federal government would be forced to choose which bills to pay. One choice that seemingly escapes the President is to spend less in the future and use the incoming money to pay the bills that the government has racked up, instead of spending more.