Debt / Economy / Fiscal policy / Politics / U.S. Domestic Policy

The Debt Ceiling: Good Politics, Not Policy

As of this past week, our federal government has managed to clear the hurdle of fully funding the Department of Homeland Security. Unfortunately, this is only one of the many vitally important budget issues on the horizon, including Medicare payments to doctors, funding for the Highway Trust Fund and our crumbling infrastructure, and the prospect of needing to raise the debt ceiling once again. Senate Majority Leader Mitch McConnell has already taken a stand and said that the United States will not default on its debt.

Stepping away from the politics of authorizing a raise of the debt ceiling, it is important to look at why the debt ceiling was created in the first place. Even more vital, however, is to determine whether or not continuously raising it is a viable and sustainable fiscal policy. One of the issues with analyzing the policy of raising the debt ceiling is that doing so is very difficult for several reasons. To put it in perhaps oversimplified jargon, raising the debt ceiling allows Congress to potentially borrow more funds for spending in the future. However, the truth is that most of the time Congress passes appropriations that cannot be met unless the debt ceiling is raised.

Of course, raising the debt ceiling occasionally is actually a necessity.  Even if the government never again increased spending, just accounting for inflation would require a raise. For example, $1 in 1940 is currently worth $16.77. Therefore, the $40 billion dollar limit set by Congress in 1940 would be the equivalent of $668 billion in today’s dollars. There are also occasions when emergency spending completely unforeseen by Congress requires spending above the amount set by the debt limit. These events can include going to war, such as in World War II, which was the first time a debt ceiling was set by Congress as well as aid and rescue efforts such as those enacted after hurricanes Katrina and Sandy. Furthermore, fluctuations in interest rates on the debt currently held by the Federal government can make it difficult to predict exactly how much will be required in order to make necessary payments.

The huge question facing us, however, is how seriously does Congress really take raising the debt ceiling? Since 1944, the debt ceiling has been increased 94 times. Ninety. Four. That means that in the last sixty years, a majority of Congress believed that it was necessary to raise the self-imposed restrictions on federal borrowing in order to avoid defaulting on the spending that it had authorized. This leads to the obvious question, why bother setting these restrictions in the first place if there is no intent to abide by them when determining appropriations measures? The truth is that arguments about the debt ceiling provide a great opportunity for politicians and activists to produce endless reams of arguments about what they would cut in spending and taxes in order to meet the requirement of staying under the debt ceiling if it were up to them.

In order to move forward, there seem to be three alternatives, the first of which would be to maintain the status quo and keep the process exactly as it is. Of course, in this scenario we would just expect to be able to sit back and watch the show leading up to a national default when politicians practice brinksmanship maneuvers, all the while hoping that it will never lead to an actual default and its possibly disastrous effects.

The second would be to return the debt ceiling to an actual relevant fiscal tool which forces Congress to consider these self-imposed limits when appropriating funding, possibly by passing legislation limiting the number of times the debt ceiling can be modified in a set period of time. Of course, this could also have the effect of increasing brinksmanship, and while much has been said about the merits of forcing a decision, studies, such as the Dutch one mentioned in this report, say that creating this sort of pressure can actually make the situation worse, not better.

Lastly, we could admit that the debt ceiling is ineffective in its current form and ultimately decide to eliminate it altogether, the precedent for which has just been set by the decision to suspend it for a short period of time. The concern with this is that if the debt limit does actually perform as an inhibitor of borrowing, eliminating it will cause spending (or borrowing made necessary by the reduction of federal revenue due to tax cuts) to skyrocket.

Whichever we choose, the overall goal should be to avoid the lockstep link between raising the debt limit and increased borrowing, or this.

Debt Ceiling Political Cartoon by Joe Wolf is licensed under CC BY-ND 2.0