What top Republican economists say about the debt limit

While many economists sympathize with the Republican Party’s skepticism of government and support of free markets, a division has emerged over efforts by congressional Republicans to use the upcoming debt ceiling deadline to force President Obama to agree to deep spending cuts.

On Tuesday, for instance, the vast majority of top economists surveyed by the University of Chicago’s Booth School of Business said that the debt ceiling, essentially, doesn’t make any sense. A full 84 percent agreed or strongly agreed with the statement “because all federal spending must be approved by both houses of Congress and the executive branch, a separate debt ceiling that has to be increased periodically creates unneeded uncertainty and can potentially lead to worse financial outcomes.”

Glenn Hubbard:
Glenn Hubbard, chairman of the Council of Economic Advisers under George W. Bush: Eleven of the last 14 debt ceiling hikes have included provisions to reduce deficits.

The Treasury Department says the $16.4 trillion debt ceiling must be raised as early as mid-February and no later than early March, or the government won’t be able to meet all its obligations, causing what the Obama administration calls a likely default.

I recently asked by e-mail the top economic advisers to former President George W. Bush  whether they thought it is reasonable to hold up raising the debt ceiling in order to force deep cuts in federal spending. Following are the responses of those who replied.

Glenn Hubbard, Columbia Business School Dean and chairman of the Council of Economic Advisers under George W. Bush:

While decidedly not ideal, I believe that 11 of the past 14 permanent increases in the debt ceiling have been accompanied by legislation related to the federal deficit or debt.  In a world without rigorous budget rules and with little White House leadership on the budget, I anticipate that the debt ceiling discussion will encompass a deficit/spending restraint discussion.  A better model would be for the President to submit the additional tax increases he envisions to finance his spending and for the Republican Congressional leaders to submit specific gradual changes in entitlement programs.  Barring that better route, we will likely see a discussion around the debt ceiling, even though there should be no chance that the nation will default on its obligations.

Keith Hennessey, a lecturer at Stanford Graduate School of Business and the director of the National Economic Council under George W. Bush:

I don't know of anyone who has the power to block a debt limit increase who is saying this.  House and Senate R leaders have all said they want to (a) raise the debt limit and (b) cut spending (or slow its growth).  I expect the House R majority will pass a bill that does just that.

Sure, a bloc of conservative House Rs might threaten to vote no on a debt limit increase that cuts spending less than they would like, but that's not "holding up raising the debt ceiling," that's voting no.  It only holds up raising the debt limit if at the same time all House Ds oppose a debt limit increase.  And in that scenario, responsibility/blame must be evenly distributed among all those who vote no, both those who want to cut spending more, and those Ds in the minority who vote no for whatever reason.

There is no special rule which says that a debt limit bill must be clean, even if that's the historic pattern.  If, for instance, the President were to threaten to veto a debt limit increase because it was packaged with spending cuts he opposed, who is holding up the debt limit increase?  Congressional Rs who voted to package both together, or the President who insisted they be separated?  Assuming enough House Rs actually vote for a bill that raises the debt limit, then they are doing their job.  If the President wants to veto such a bill, then he's the one acting to kill a debt limit increase.

Harvey Rosen, Princeton professor and former chairman of the Council of Economic Advisers under President George W. Bush:

One of the purposes of good economic analysis is to point out tradeoffs, and this issue is no exception.  The expected cost of the threat to hold up raising the debt ceiling is whatever disruption to the financial markets that might take place.  The expected benefit is whatever improvement to the economy that would be generated by cuts in government spending (if the cuts actually took place; one must allow for the possibility that the threat would not ultimately be effective).  If the latter is greater than the former, then it makes sense to threaten to hold up raising the debt ceiling, and vice versa.  Personally, I'm not sure what the answer is.  My guess is that you'll be able to find economists who think that they do, and they'll be able to provide you with much punchier quotes.

Lawrence Lindsey, chief executive officer of the Lindsey Group and former director of the National Economic Council under George W. Bush:

Philosophically, the "power of the purse" on which representative democracy got its start and is still based is a very complicated thing.  Before the development of the kind of capital markets we see today it was effectively limited to the power to tax, which is what Article 1 goes into great detail about.  But if borrowing is de facto unlimited, the power to tax is hardly a power of the purse.  Congresses of both parties have used it as leverage on the Executive.  So while hardly elegant, it strikes me as an inevitable outgrowth of the kind of capital markets we have today.

It is also an inevitable outgrowth of the move toward budgeting on automatic pilot, a move which was enshrined in the 1974 Budgeting reforms really for the precise purpose of limiting the messiness involved in the appropriations process, which had been the traditional check on spending.  A central tenet of legislative power in a democracy is that no Congress may bind a future Congress.  That allows the voters in a representative democracy to change their minds.  But, if most of the budgeting process is off-limits and not subject to appropriation by each succeeding Congress, then effectively we have most of the budgeting process as out of control of the legislature as it was during Charles I and the Long Parliament.  So again, use of the debt ceiling is an inevitable consequence of other changes in the budgeting procedure and cannot be separated from them if one believes philosophically in the central tenets and historical backdrop on which the Constitution was written.

Practically, it is far from ideal, but I do think that some of the disaster scenarios associated with it in much of the political discourse are exaggerated.  As a practical matter it will not lead to a default as debt service is prioritized.  So the credit rating issues are a bit of a canard. The credit rating -- which is bound to go down -- is really a function of the unsustainable position of the U.S. fiscal situation and the unprecedented peacetime expansion of spending to almost a quarter of GDP. So I really see this whole issue as a throwback to the old (and I am old enough to remember them) battles over appropriations.  No question the whole process is messy.  But if you don't like messy you probably wouldn't have a bicameral legislature which is constitutionally separate from the executive.

(...) To me, taking the debt ceiling debate outside of the historical process that placed us here is really not an honest way of evaluating the issue but merely a way of discussing a short term political problem in a way to produce a desired short term political outcome.

Zachary A. Goldfarb is policy editor at The Washington Post.
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