My latest column at the Christian Science Monitor:
America’s leaders need to get to yes on a budget deal – one that marries substantial deficit cuts with a much-needed increase in the debt limit.
But that’s not enough. Rather than merely increasing the debt limit, we should eliminate it.
I realize that sounds strange. With all the Sturm und Drang in the budget talks, you might think that the debt limit is essential to controlling Washington’s profligate ways. It’s not.
Washington has other tools for managing its finances. The annual budget process includes a series of steps by which Congress decides how much to spend and to collect in taxes. Those decisions determine the size of America’s deficits and debt.
That simple fact often gets lost in the debate, so let me say it again: When Congress decides how much to spend and how much to tax, it is also deciding how much to borrow.
Unfortunately, the debt limit allows lawmakers to pretend that they can separate the two. Members routinely try to wrap themselves in the flag of fiscal responsibility by voting against debt limit increases. In most cases, though, those members have also voted for spending and tax policies that make those debt increases necessary.
Votes on the debt limit thus usually reflect raw politics, not substantive policy differences. Everyone knows that the debt limit has to rise. But they also know that voters hate debt. So law-makers jockey to see who can win the right to vote no and who must bear the burden of voting yes.
Democrats opposed debt limit increases when President George W. Bush was in office and Republicans controlled Congress. Republicans returned the favor under President Obama and the Democratic Congress. The only times we’ve seen hints of bipartisanship are when, as now, divided government has placed some responsibility on both parties.
A larger problem is that the debt limit institutionalizes risky brinkmanship. In divided government, both parties must agree to raise the debt limit. If they don’t, the United States can’t pay all its bills. We might even default on our debt. That’s the economic equivalent of driving over a cliff.
Both sides would regret that outcome. But they face very different incentives. The party that holds the White House has to make sure that the government functions. That’s why Treasury Secretary Timothy Geithner has repeatedly warned Congress about the damage that would result if the debt limit isn’t raised in time.
But the opposing party wants to extract the highest possible price for agreeing to more debt. So they have to act as though hitting the limit is no big deal. That’s why many Republicans have been discussing the potential to prioritize payments (putting interest first), and some have flirted with endorsing temporary default.
The problem with that strategy is that negotiations can fail, prioritization might not work, or we might be surprised with a sudden need for funds. In short, we might accidentally go over the brink.
Even if we don’t, dancing on the edge is costly. Alone among major nations, the US talks openly about the possibility of default. Financial markets usually discount that rhetoric as mere politics. As the deadline nears, however, that rhetoric will sow doubt in financial markets, inspire warning shots from credit-rating agencies, and potentially increase our borrowing costs.
There’s no reason to subject ourselves to those needless costs. The debt limit is an anachronism. Congress should eliminate it.
P.S. In conjunction with the eliminating the debt limit, I would strengthen the existing budget process along the line the Bipartisan Policy Center’s SAVEGO proposal. We do need budget procedures to force action, just not the brinkmanship of the debt limit.
P.P.S. Reuters reports that Moody’s is also recommending the elimination of the debt limit.
Dreamer.
Hmm. Does SAVEGO use the typical CBO 10-year budget window? If so, it seems like there is a bit of a bias towards short-term savings (and adding longer-term out-of-budget window costs). I think we probably need something where the incentives are reversed.
In regards to just using the budget for what to spend and tax hasn’t Congress been operating without a budget now for two years?
I agree we should eliminate the debt ceiling, but it would take a Constitutional amendment. Article 1 Section 8 of the Constitution vests the power to borrow money in the Congress. Eliminating the debt ceiling would give the power to borrow to the Executive Branch.
So, let’s start a drive to amend the Constitution.
@Rich How would eliminating the debt ceiling give the power to borrow to the executive branch?
I have not read the actual legislative language of the debt ceiling (but am passingly familiar with its history), but it seems to me that the power to tax and spend will still reside with Congress (and to the degree spending exceeds tax collections, so will the power “to borrow money on the credit of the United States”).
Why would a constitutional amendment be required to change the mechanism by which Congress allows the gov’t to borrow money? Get rid of the debt ceiling and put in place a more flexible mechanism. I ask in sincerity, not snark.
@JR The debt ceiling is a legislative shortcut for authorizing borrowing. Prior to the debt ceiling, Congress had to pass a bill every time the Treasury had to borrow. The debt limit allows Congress to authorize borrowing in large chunks eliminating the need for near constant authorizing legislation. Eliminating the debt ceiling would require a Constitutional amendment because absent a debt ceiling, the Executive Branch would be authorizing the debt and Congress cannot just hand over its authority.
@Rich
Your discussion of the history matches my understanding. But again, I don’t understand why replacing the debt ceiling legislation with a more flexible, legislative mechanism would require a constitutional amendment.
The Constitution only says that the the power “to borrow money on the credit of the United States”. It does not state it has to operate that power via the current debt ceiling legislation. That came after, in response to the earlier, problematic process that you note. So it seems to me that the current debt ceiling legislation could be replaced with a more flexible mechanism without constitutional amendment.
@JR I am not a Constitutional scholar, but my understanding is that Congress must authorize all borrowing. Simply abrogating that responsibility is not Constitutional, but the Constitution also says only Congress has the power to declare war and they have abrogated that responsibility.
The debt ceiling legislation is the required authorization. I don’t see how a piece of legislation could be written that authorizes borrowing and also allows the Executive Branch to borrow as much as is needed. Debt ceiling legislation that raised the ceiling in increments of $500 Trillion would functionally eliminate the debt ceiling, but I don’t see that happening.
@Rich, Nor am I…It’s an interesting side topic though. However, I suspect we’ll continue living with the debt ceiling legislation that we have and the fights that ensue. It may be in the country’s interest to change it; it may not be in either political party’s to change it.
Rich I totally hear what you’re saying…..