The US debt crisis, a calamity or tempest in a teapot?

If Congress does not raise the national debt ceiling by the August 2
deadline and the US defaults on its financial obligations at home and
abroad, would it spell calamity or be but a tempest in a teapot?

That has been the subject of considerable public debate in recent months, clouded over by layers of partisan politics.

As of the beginning of the month, the nation’s outstanding debt totaled
$14.46 trillion, about 98.6 percent of calendar year 2010’s annual gross
domestic product of $14.66 trillion. The International Monetary Fund
ranks US debt as the 12th highest compared to other nations. The current
debt ceiling of $14.3 trillion would have to be raised in order to pay
creditors in August.

Democrats, backed by some
economists, say failure to raise the debt ceiling would create a
disaster of epic proportions, a crisis that would make the 2008 credit
crisis look like a tea party (not the Tea Party).

“If this country defaults on its obligations it will be much worse than
the Great Depression and it would make the massive financial crisis of
2008 look mild,” said Treasury Secretary Tim Geitner, a Democrat.

“Those who say this crisis would be a blip on the radar are wrong,” said
Senate Majority Leader Harry Reid, also a Democrat. “Default would be a
plague that would haunt our nation for years to come. Our credit rating
would take years to rebuild. The country would never be the same.”

Republicans, backed by other economists, counter that warnings of
impending doom are without foundation, much ado about little. Some argue
default would have the silver lining of forcing government to do what
families have to do, balance their checkbooks.

That may be stretching things a bit. Many American families have not
lived within their means. They have leveraged spending with credit cards
and many are knee high in debt just like the government. Others
voluntarily took or were cajoled by unscrupulous banks and lenders into
taking on mortgages they could not afford and now are loosing their
homes.

Budget battles are almost a right of passage for presidents, one way
members Congress, especially from the opposing party, test their mettle
as leaders. The current debt ceiling flap is different in that it comes
on the eve of a presidential election campaign, putting the fight on
steroids.

President Barack Obama’s Republican opponents have decided to break with
a decades old tradition of rubber-stamping hikes in the debt ceiling
and insist that any new increase be coupled with a plan for debt
reduction and tax relief, not a bad sounding idea.

The devil and his henchmen are in the details. Debt reduction Republican
style is best achieved by hefty cuts in government spending, including
on entitlement programs such as Social Security and Medicare and tax
relief that primarily benefits the well-to-do and businesses, which they
see as key to revitalizing the economy.

Democrats would leave Social Security untouched and focus on cuts in
government spending, higher taxes for the wealthy, closing tax loopholes
for big business and some tax hikes.

The debate becomes less about numbers and more about ideology on how the
government should spend taxpayer money, a testing of the waters on the
viability of issues for the 2012 presidential campaign.

There is little question that, barring some other unforeseen national
crisis, the economy will be at center stage in the upcoming campaign.
Unemployment is in political nosebleed territory at 10.3 percent.
Nationwide defaults on home loans continue and thousands of families are
losing their homes and the costs of goods, services and healthcare
continue to climb.

Thus, how the government resolves the current crisis is important. Both
Democrats and mainstream Republicans, perhaps frightened by the fringe
Tea Party Republicans and their slash and burn approach to budgeting,
have tried for months to forge workable plans to raise the debt ceiling
while bringing down debt. There has been a great gnashing of teeth,
wringing of hands and warnings of doom and gloom but no plan on which
both sides could agree.

However, a plan proposed Tuesday by a bipartisan group of Senators known
as the Gang of Six—actually there are now five since one, Republican
Senator Tom Coburn left the gang—shows signs that it could gain
traction.

The plan takes on sacred cows from both parties. It calls for both
reductions in Social Security and tax expenditures and combines a
deficit-reduction down payment with requirements that congressional
committees make further deficit reduction, tax reforms and reductions in
entitlement and healthcare programs.

The plan includes $1.5 trillion in tax cuts and would reduce the deficit
$3.7 trillion over 10 years. It lowers tax rates by eliminating
loopholes, and raises $1 trillion in new revenues, translated, new
taxes.

The President likes the Gang of Six plan, therefore most Republicans
will dislike it. There already are signs of that. A memo released by
House Budget Committee chairman Paul Ryan, a Republican, said the plan
“increases revenues while failing to seriously address exploding federal
spending on health care, which is the primary driver of our debt.

There are also serious concerns that the proposal’s substance on
spending falls far short of what is needed to achieve the savings it
claims,” the memo said. Ryan authored a “Path to Prosperity” budget
earlier in the year, parts of which Newt Gingrich, a fellow Republicans
and candidate for President, described as too radical.

On the same day the Gang of Six offered its plan, Republicans in the
House passed a Cut, Cap and Balance proposal on a mostly party line
vote. It has little chance of passing in the Senate and would be vetoed
by President Obama if it did.

So barring yet another plan, that of the Gang of Six looks most promising to be worked into legislation.

The public is fed up with both sides of the dispute and want politicians
to just get it done. A poll conducted last week by the Gallop
Organization and USA Today found that a solid majority of Americans want
elected officials to compromise to reach a debt ceiling deal.

Two-thirds favored compromise, versus 27 percent who want members of
Congress to hold out for their desired plan. A majority of Americans,
Republicans, independents, and Democrats – favor a compromise, the poll
found. It also showed that by a 20-point margin, Americans worried that
the government would raise the debt ceiling without major spending cuts
and that an economic crises would result.

Congress has 13 days to approve a plan. If it fails to do so and the
country defaults, the president can use emergency powers to raise the
debt limit unilaterally.