The debate over raising the debt ceiling has passed, but the debt crisis will be with us for years to come. Unlike news of celebrity meltdowns and notorious crimes, the debt crisis has some tricky points that the press has not well explained. Everyone needs to know about debt ceilings and default and their consequences, taxing the rich, what the people really want (a miracle, of course), and the balanced budget amendment. There never was a danger of default, but the shape of the real problem has been left ill-defined by the press.

Debt Ceiling and Default

The US has more than $14 trillion in debt. Every month some of it comes due. If the debt limit remains fixed the interest must be paid, but the principle can be borrowed again. Suppose the debt ceiling is $14.2 trillion and one month $100 billion of the debt comes due, plus the interest on all of the debt for that month. Say the interest is about $25 billion. When the $100 billion is paid, the debt is $14.1 trillion. Another $100 billion can then be borrowed while staying under the $14.2 trillion limit. That could be done every month. The interest however, cannot be paid by borrowing. The additional $25 billion would exceed the debt ceiling.

Default describes the inability to pay the interest. Bond holders get very upset if they are not paid the interest they are due, or even if the payment is delayed. The US still collects taxes, and every month receives about $200 billion is fresh new cash. That’s about ten times what is needed to pay the interest. Paying the interest is always top priority, so there is no chance it wouldn’t be paid.

Threat of Default

The only way default is possible would be if the President directed the Secretary of the Treasury not to pay it, but to spend the tax revenues on something else instead. The tax revenue is enough to cover debt interest, Social Security, Medicare, military pay, and no much beyond that. Failure to pay interest on the debt would drop the US credit rating from AAA to D, meaning interest rate for future borrowing would rise from about two or three percent to about 17%. That would be a financial disaster.

House Republicans passed a law that would require the President to pay the debt as top priority. That would assure bondholders they would be paid. Senate Democrats killed the legislation. The only reason for doing that was to keep the theoretical threat of default alive so that Republicans could be accused of bringing the country to the edge of default, even though there was no real possibility of that happening.

Not all Republicans were eager to quash the theory that default was possible. They could pressure President Obama to agree to their terms to avoid the theoretical default. It takes two sides to maintain a disagreement. Republicans can be blamed for failing to agree, but it is also equally true that Democrats failed to agree. Either side could have folded at any time to obtain agreement. The false threat of default was useful to each side to bludgeon the other.

The press largely played along as if the threat of default was real. CNN never wavered from saying that the US would default on August 2nd if an agreement was not reached. Fox News did much better in explaining the situation, but not uniformly so. The press performance in general was so poor as to pose the question of whether they were corrupt or just merely incompetent.

Consequences of Not Raising the Debt Ceiling

Rep. Michele Bachmann, Sen. Rand Paul, and others voted against raising the debt ceiling. They correctly pointed out that there would be no default and the Social Security and Medicare would be paid in the near future. They did not disclose, and the press was remiss in asking, was how they proposed to handle future shortfalls. Presumably no one would much care if defense contractors were stiffed for a month, but was the plan to let them all go bankrupt? Baby boomers have started to retire in large numbers, so what would they do to change entitlements to balance the demand? Entitlement cuts would have to go well beyond the Ryan plan, for example. So what do they propose?

Taxing the Rich

Democrats wanted increased taxes on the “rich.” Eliminating the Bush tax cuts on the top bracket could theoretically raise as much as $100 billion a year. The deficit is $1650 billion this year and is projected to stay at the $1 trillion level for as far as the eye can see. The press was shy about asking how, specifically, the other 93% of the problem would be solved.

There have been recent attempts by states to tax the rich. New York raised tax rates, but only received a small fraction of what simple arithmetic predicted. Maryland and Oregon raised tax rates, and revenues dropped. The tax code has about 37,000 pages of loopholes, all designed by Congress to encourage doing something other than paying taxes. The ultimate loophole is to invest overseas, beyond the reach of American tax law. That’s easier than ever before. Proposals to tax the rich bear scrutiny.

The People Demand a Miracle

Amidst the furor, the American people have spoken clearly. They want fiscal responsibility and debt reduction with no reduction in government benefits or increases in their taxes. For every poll showing overwhelming support for fiscal responsibility there is a poll showing overwhelming support for keeping all benefits and having someone else pay for them. Americans will settle for nothing short of a miracle.

This is a longstanding problem with democracy. In the 1754, British Member of Parliament Edmund Burke cautioned:

A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largess from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship.

A Balanced Budget Amendment

Burke’s solution was a constitutional republic that placed restrictions on carrying out the popular will. The Bill of Rights worked to secure individual freedoms from majority abuse. Jefferson and other founders wanted some form of balanced budget amendment to protect against financial abuse. It didn’t happen, and it’s remained a point of controversy ever since. In 1995, a balanced budget amendment came within a single vote of Congressional approval.

Those are the basics of debt crisis. We have about ten years, if nothing is done, until financial collapse. That’s when the debt interest cannot be paid. This guide will be useful for quite a while. Then we can get back to a steady diet of celebrity meltdowns and mysterious disappearances.