Ignore political theatrics of debt ceiling debate

Ah, debt … a pillar of American-style capitalism.

I say, “American-style” capitalism because there is no such thing as a pure capitalist system, except on paper. Adam Smith and Milton Friedman are probably turning in their graves at the way our capitalist system operates – full of money in politics pulling all sorts of levers resulting in government’s hands interfering with the “free” market. But no lever is bigger than the lever of debt, how it is accessed, utilized and taxed.

The debate on the so called “debt ceiling” is nothing but political theatrics. We should all just ignore it. If we want to have a serious talk about debt, we need to have it on the front end, when we are making the actual budget and subsequent ad hoc spending decisions; and when we are making decisions about reduction in revenue, too (tax cuts). Talking about whether we are going to pay our bills for what we have already spent is all for show.

We are going to pay our bills. Better to talk about what, exactly, is an acceptable amount of debt for the U.S. to have. Seriously, how many of us have more debt than we make in a year? But it is not appropriate to compare the government’s debt to a household or even a business. It is not the same thing.

Debt can be a powerful instrument of leverage, increasing potential return and/or reducing the cost of capital. The government knows this, which is why interest on debt is tax deductible for businesses. The interest on your mortgage debt is tax deductible. Sales taxes are deductible. Why? To encourage businesses and you to spend. I even remember when interest we paid on our credit card debt was tax deductible. We love debt. It is not coincidence that consumer spending represents two-thirds of our GDP.

Theoretically, the growth that is spurred by the tax break of obtaining debt for businesses and individuals comes back to the government in the form of increased tax revenue – with “theoretically” being the key word here. On paper, it looks awesome. In theory, business growth, which comes in the form of capital reinvestment and hiring, will result in higher net income, which will lead to higher tax revenue to the government. For individuals, the theory is that the tax benefit of obtaining a loan to buy a house leads to increased consumer consumption: buying a house has a ripple effect of creating jobs, which then increases tax revenue.

But there is really no way to scientifically prove that any of this happens. It all works fine on paper, but it is impossible to create a controlled experiment in a world where everything is constantly changing. There is no way to do an accurate “afteraction” analysis. We try, but there are always countless caveats and variables.

So, what do we do now? Simple, raise the debt ceiling and pay our bills.

Then, to address the elephant in the room, we need to have a frank discussion on what exactly is an acceptable amount of debt for the U.S. government. Then, and only then, we must attack the equation from both sides.

It is too easy to simply say, “cut spending or raise taxes.” When you don’t even know what the equation is, it will be impossible to solve.