As a long-standing deficit hawk, I would like to say something nice about the debt limit — but I just can’t do it.
The debt limit, as currently structured, has no useful economic or budgetary purpose and carries serious potential risks. It is more likely to result in a dangerous showdown over the nation’s creditworthiness than it is to control the unsustainable growth of debt. As the Government Accountability Office (GAO) has correctly observed, “An alternative approach to the debt limit is needed.”
This subject will likely get more attention in the coming weeks because on Aug. 1, the debt limit springs back to life, after having been suspended since August 2019. The new limit will be set at whatever level the debt happens to be on that date.
The Treasury Department will still be able to use “extraordinary measures” to keep its borrowing under the limit, but in a statement on May 5th, the Treasury warned, “In light of the substantial COVID-related uncertainty about receipts and outlays in the coming months, it is very difficult to predict how long extraordinary measures might last.”
Treasury Secretary Janet YellenJanet Louise YellenBlowing up the Death Star would cause an economic crisis (and other reasons employers shouldn't pay off workers' college debt) Buttigieg has high name recognition, favorability rating in Biden Cabinet: survey Biden's spending binge makes Americans poorer, just before the holidays MORE explained at a recent congressional hearing that those measures might only last for a few weeks, meaning that policymakers would soon be facing a crisis unless swift action is taken.
That might not be easy. A conventional vote to lift the debt limit would likely be blocked by a Senate Republican filibuster over demands that it be conditioned on spending cuts that Democrats would not accept.
Democrats could raise the debt limit through the budget reconciliation process without Republican votes but it does not appear that they could suspend the debt limit through this process. The law requires a debt limit reconciliation bill to “specify the amounts by which the statutory limit on the public debt is to be changed.”
In any event, it is possible that not all Democrats would support using reconciliation to raise or suspend the debt limit, and with razor thin majorities in the House and Senate the reconciliation route could be unavailable.
So at some point this fall we might be faced with a situation where the government can’t pay its bills because it can’t issue new debt, and Congress can’t do anything about it because it doesn’t have the votes to raise or suspend the limit.
Failure to resolve this standoff would eventually result in a default on at least some of the government’s obligations, which GAO has found would increase borrowing costs and damage the perceived safety of Treasury securities.
Before plunging the nation into a needless debt crisis, policymakers should consider whether the debt limit is worth the trouble. There is no doubt that the debt is on an unsustainable track over the long-term. Reviving the debt limit, however, would do nothing to change that.
Unlike budgetary controls such as discretionary spending caps or the pay-as-you-go rule for entitlement and tax changes, the debt limit does not affect the policy decisions that produce mounting debt. All it does is prevent the government from borrowing to pay for the spending and tax decisions that Congress and the president have already made. That’s strike one.
Strike two is that the debt limit is not tied to any economic goal, such as a percentage of the gross domestic product, or to any budgetary plan aimed at reaching an economic goal. It is simply an arbitrary number.
We don’t need a hard dollar cap on the debt. A more rational goal would be to first stabilize the debt and then bring it down to a sustainable level relative to the economy. Even if the debt continues to grow in dollar terms, it will become less of a threat if it grows more slowly than the economy.
Consider the post-World War II example. At the end of the war, the debt was $242 billion and 106 percent of GDP. By 1974, the debt had grown in dollar terms to $344 billion but had shrunk to only 23 percent of GDP and was far more affordable.
Strike three is that the debt limit’s main purpose these days is to act as a hostage in budget negotiations. In recent years, the nation has been recklessly driven to the brink as policymakers debated over conditions for a debt limit increase.
Some argue that the debt limit provides useful leverage to extract fiscal reforms that would be hard to enact otherwise. However, the full faith and credit of U.S. securities should never be put at risk as a mere bargaining tool. Even if intended as a bluff, there is a risk that this tripwire might be triggered accidentally.
If politicians want to reform the debt limit so that it might do some good, they could come up with a way to tie the nation’s debt to an economically relevant standard such as the growth rate of the economy. They could also align debt limit increases in a timely manner with the policy decisions that require more borrowing, such as automatically linking an increase to the amount needed to implement spending and tax levels approved in the budget resolution.
Whatever they decide, it should be clear that there is nothing “fiscally responsible” about threatening to default on any portion of the government’s bills. It would damage the nation’s creditworthiness and economy while doing nothing to address the underlying mismatch between federal spending and revenues that is producing higher debt.
The real solution to unsustainable debt is not to risk default but to enact more fiscally responsible policies in the first place.
Robert L. Bixby is executive director of The Concord Coalition.