It’s time to eliminate it.
On Sept. 8, in what has become a Washington ritual, Congress increased the debt limit, essentially authorizing the federal government to pay its bills—for 90 days. The debt limit, also known as the debt ceiling, must be increased again. On Dec. 11, Treasury Secretary Steven Mnuchin informed House Speaker Paul Ryan that Treasury is taking “extraordinary measures” to come up with the cash necessary to make good on the government’s commitments. Among other things, Treasury will suspend investments in Civil Service and Postal Service retirement funds.
But these actions will provide enough cash only until Jan 31, 2018. Mnuchin urged Congress to act to protect the full faith and credit of the United States.
Debt ceiling politics is simply gamesmanship; it encourages needless brinkmanship and it endangers the creditworthiness of the United States. To paraphrase former Fed Chairman Ben Bernanke—refusing to raise the debt limit is unacceptable no matter what the reason.
I propose we eliminate it altogether. Here’s how, along with some background:
What is the debt ceiling?
The debt-ceiling extension is not about spending more money. It is about paying for what is already spent. Furthermore, the rationale and apolitical way to permanently address this issue is simply to eliminate the current debt limit process. Sounds scandalous, but it’s not.
Each year the president proposes a budget (actual spending is approved only later, after Congress passes appropriations bills that the president must sign into law). If all goes according to schedule, spending commences on Oct. 1, at the start of the fiscal year. But the appropriations process rarely goes well, and the government routinely spends more money than it takes in. The federal government has run budget deficits in 43 of the last 47 years.
How do we obtain cash to pay bills when revenue is not sufficient?
We borrow. The cumulative total of all previous annual deficits has aggregated to over $20 trillion of gross debt. In some years, the deficit has been as large as $1.4 trillion, as during the 2009 financial crisis. The last budget under the Obama administration had a $550 billion deficit; that’s projected to grow to $1.1 trillion by 2024, perhaps more if the Republican tax “reform” is approved.
What happens if the debt ceiling is not raised?
It is highly unlikely the government would default on its debt payments. That would be unprecedented and would severely damage the long term credit rating of the United States. Instead, the government would most likely forego paying other bills—maybe Social Security checks, maybe Medicare payments, maybe government salaries. Somebody would need to prioritize bill paying so that debt payments on bonds could be made.
What’s the problem with prioritizing bills?
Imagine the politics. Furthermore, prioritization of bill paying is really default by another name as the government would choose to not pay certain obligations in favor of meeting others. All claims are backed by the credit of the government. The once-golden credit of the U.S. government would be compromised, resulting in higher interest rates.
How many times has the debt ceiling been increased?
The debt ceiling has been increased 85 times since 1959. Each time, Congress and the president ultimately reach an agreement. And always, the delay was strictly political. During Obama‘s presidency, Republicans withheld raising the debt ceiling in an unsuccessful bid to force the administration to abandon the Affordable Care Act (eventually wiser heads prevailed). In 2006, during the George W. Bush presidency, then-Senator Obama voted against raising the debt ceiling as a political statement against financial irresponsibility.
Supporters of the debt ceiling argue that it’s needed as a curb against unsustainable national debt. The United States’ gross debt is now almost 100 percent of GDP; the Congressional Budget Office projects it to increase to 185 percent of GDP by 2040.
Why not retain the debt ceiling—does that not solve the problem?
It does not. The way to reduce debt is to limit spending or raise taxes. Each year, Congress and the president approve spending and revenue and those decisions determine the debt that must be issued. If budgets were lower or taxes higher, debt would decrease.
Why we should eliminate the debt ceiling
The debt ceiling debate is counterproductive and politically driven, and it plays no constructive role in budget policy. Think of it this way: If Congress and the president approve spending bills that result in a deficit, they have explicitly agreed that more debt is needed to pay bills. We could certainly have a discussion about what is driving spending (mostly Social Security, Medicare Medicaid and Defense) and how reducing these costs would lower the amount of debt. But that’s a separate discussion.
What needs to happen?
When appropriations bills are enacted, the statutory debt ceiling should automatically increase to pay obligations that are consistent with the assumptions in the spending bills. That’s just logical, but is ignored for political reasons.
Eliminating the debt ceiling would stop the needless and unproductive rain dance that happens periodically.
Rich Keevey served as chief financial officer at Housing and Urban Development and deputy undersecretary for finance at Defense. He also was the Budget Director for the state of New Jersey under two governors. He is currently a senior policy fellow at the School of Planning and Policy, Rutgers University; and a visiting professor at the Woodrow Wilson School, Princeton University.