The debt limit will be raised

There's a lot of political posturing going on in Washington, but by the end of the week we are almost certain to see an increase in the debt limit, because neither party can afford to fail on that issue. What is not clear, however, are three things: 1) how much the limit will be raised (will it be a short-term fix, or a fix that will take us beyond next year's elections?), 2) how much spending will be cut (spending will definitely be cut), and 3) whether taxes will increase. On the latter point, I see almost no chance that tax rates will increase; if higher revenues are part of the deal, the money will come as the result of cleaning up the tax code (eliminating deductions), and from a stronger economy. The economy is not strong enough to sustain tax rate increases, and everybody knows that.

So by the time the dust settles later this week, there's a very good chance that we will see Washington take action to fix our biggest problem, which is too much spending. The debt limit debate has served a good purpose, which has been to focus the public's mind on the huge growth in government spending that has left us with a staggering burden of debt in just a few short years. It's about time. Fiscal policy was on an unsustainable course, and now it looks like a  course correction is imminent. The problem won't be completely solved, of course, because it will take years to fix. But next year's elections will give the people ample time and opportunity to think about our priorities. I suspect that the ongoing popularity of the Tea Party reflects a widespread and growing belief that government has become too large and must be cut back. If that's the case, then there is plenty of room for optimism.

Whether US debt is downgraded or not is almost a side-show compared to the bigger, long-term issue of the size of government. A downgrade doesn't seem very likely, but if it were to occur it would just add to the pressure to cut spending, a process that is already underway.

But all this is hardly news, and I only point out the obvious. A quick glance at the bond market, where 10-yr Treasuries are trading at 3%, is enough to know that the market is not at all concerned about the possibility that the US might actually default on its debt obligations.

UPDATE: This quotation from Thomas Babington Macaulay seems to fit perfectly the emerging mood of the people:

Our rulers will best promote the improvement of the nation by strictly confining themselves to their own legitimate duties, by leaving capital to find its most lucrative course, commodities their fair price, industry and intelligence their natural reward, idleness and folly their natural punishment, by maintaining peace, by defending property, by diminishing the price of law, and by observing strict economy in every department of the state. Let the Government do this: the People will assuredly do the rest.

HT: Don Boudreaux