Friday, September 8, 2017

No Need for Debt Ceilings

Once upon a time, there was no aggregate debt ceiling in the United States. Items of indebtedness were authorized by Congress on more of an individual basis. But then, in “the 1930s, Congress moved towards aggregate constraints on federal borrowing that allowed the Treasury greater ability to respond to changing conditions and more flexibility in financial management.”  [1] The idea was to allow the Treasury Department more leeway to borrow as necessary, so long as it stayed within the set limit. This debt limit, or debt ceiling, has been raised several times since then.

Now it is important to keep in mind that the debt ceiling is a limitation on how much the federal government may borrow. It is not a limit on how much indebtedness the government may incur. So Congress may authorize any number of government expenses without having to worry about the debt ceiling. But if those expenses turn out to be more than the debt ceiling, and the expenses cannot be paid with cash on hand, as it were, then it has to raise the debt ceiling so that the Treasury Department can borrow the necessary money to pay the bills.

Now, of course, one would expect raising the debt ceiling when necessary would be a perfunctory operation. While reasonable people might differ on what liabilities should be incurred in the first place, once an indebtedness arises it should be paid. Certainly this is true where the credit of the United States is on the line. And, actually, defaulting on the public debt is arguably unconstitutional, since Section 4 of the 14th Amendment provides that the “validity of the public debt of the United States, authorized by law…shall not be questioned.” [2] Surely no responsible public servant would endanger the credit of the United States by causing it to default on the public debt, or even threaten to do so.

Well, actually...

In 1995, House Republicans threatened to not raise the debt ceiling “unless President Bill Clinton agreed to a package of sweeping spending cuts.” [3] They redoubled their efforts in 2011, threatening the world economy, and resulting in a downgrade in the nation’s credit rating. [4] Undaunted, House Republicans went at it again in 2013. [5] In essence, they took the country hostage in support of their fiscal program. They justified their conduct by taking advantage of the public’s understandable confusion between incurring additional debt and raising the debt ceiling in order to pay debt that was already incurred.

They tried to sell their threat as fiscal responsibility, when, in fact, failing to raise the debt ceiling would have caused the United States to default on its obligations. Each time they ultimately acquiesced, and one hopes it was because they actually perceived how irrational it would have been to disallow the Treasury Department to discharge existing indebtedness. But at no time did they attempt to disabuse the public of any misconceptions they might have created.

In any event, even a delay in raising the debt ceiling can have deleterious consequences. The Government Accountability Office “estimated that delays in raising the debt limit in 2011 led to an increase in Treasury’s borrowing costs of about $1.3 billion in fiscal year 2011.” [6]

Now the Republicans are in complete control. They have both houses of Congress and the White House, and should have no need of a doomsday weapon like threatening to not raise the debt ceiling. But it seems they might have been concerned that the Democrats might swipe the weapon from the Republican arsenal, and it appears that there was good reason for their apprehension.

The recent Republican plan on point “was to raise the debt ceiling for eighteen months, which would kick the next difficult vote past the 2018 midterm elections.” [7] That would facilitate smoother sailing for their agenda, without having to worry about Democratic blackmail. But for “weeks, Chuck Schumer, the Senate Minority Leader, had been plotting a strategy to use the debt-ceiling vote to extract concessions from Donald Trump and his fellow-Republicans.” The Democratic plan was to raise the debt ceiling for only three months. The punchline is that any raising of the debt ceiling will require Democratic votes, since opposition can be expected from the Republican Party’s nihilist wing.

Now one would have been reasonable in expecting President Trump to follow congressional Republicans on this. After all, he was willing to allow his presence to be odious in future history books with the misanthropic Republican health plan. But here he surprised everyone, and “struck a deal with Democratic congressional leaders on Wednesday to increase the debt limit and finance the government until mid-December, blindsiding his own Republican allies as he reached across the aisle to resolve a major dispute for the first time since taking office.” [8] What’s more, he “said on Thursday that he and congressional leaders had discussed the possibility of jettisoning a long-standing cap on U.S. government debt, saying it is not really needed.” [9] That means he is considering getting rid of the debt ceiling entirely.

And he’s right. It isn’t really needed. Spending should be controlled on the front-end, not after liabilities have already been incurred. All the debt ceiling accomplishes for us is to provide a way for unscrupulous politicians to blackmail the country by threatening to ruin its credit. We have no need of that at all.