By now, it must be obvious to almost everyone that the federal debt ceiling has outlived whatever usefulness it once had. It does not discipline government spending in any predictable way. On the contrary, it creates artificial crises with possibly calamitous economic consequences and — just as bad — discredits both political parties. Confidence suffers while the supposedly most powerful nation on Earth debates whether to pay all its bills. It’s time to end the debt ceiling.
We are now facing one of those manufactured crises. The debt ceiling is $18.11 trillion. Since the spring, the Treasury has taken “extraordinary measures” to avoid violating it. But Treasury Secretary Jack Lew says that by Nov. 3 the government’s cash balances may drop below $30 billion. Meanwhile, daily payments can run as high as $60 billion. Unless the debt ceiling is raised, allowing the government to borrow again, some routine payments — for debt service, Social Security, defense contracts, who knows? — will be missed. What happens after that is anyone’s guess.
The fact that the ceiling and the selection of a new House speaker are entangled makes the outcome harder to predict. But the underlying political impasse is clear. Many House Republicans want to use an increase in the debt ceiling as a legislative lever to get the Obama administration to accept spending cuts. The White House has refused and insists on a “clean” bill increasing the debt ceiling.
Originally, the debt ceiling simplified a byzantine process. A Congressional Research Service report summarizes the history:
“Before 1917 Congress typically controlled individual issues of debt. In September 1917, while raising funds for the United States’ entry into World War I, Congress also imposed an aggregate limit on federal debt in addition to individual issuance limits. Over time, Congress granted Treasury Secretaries more leeway in debt management. In 1939, Congress agreed to impose an aggregate limit that gave the U.S. Treasury authority to manage [the] federal debt.”
The real issue now is the size of government — a subject deserving an honest debate. Both parties have sidestepped it, because an honest debate would require both to admit unpleasant realities.
Take Republicans first.
They would have to concede that, even with deep spending cuts, Big Government would remain. Consider a proposed budget by the Republican Study Committee, a conservative House caucus. From 2016 to 2025, it would reduce federal spending by $7 trillion. Obamacare would be repealed. By 2025, defense spending as a share of the economy (gross domestic product) would drop to its lowest point since 1940. “Discretionary” domestic spending would fall almost 50 percent (again, as a share of GDP) from 2000 levels, squeezing many federal activities: parks, courts, research, transportation, homeland security (including border control), the FBI, regulatory activities, the Centers for Disease Control and Prevention.
But after all this slashing, government spending would remain at 18 percent of GDP, not much lower than the 20 percent average from 1965 to 2014. Taxes would also be 18 percent of GDP, slightly higher than their 1965-2014 average of 17 percent. The reason that government doesn’t shrink much is simple: Rising spending on retirees and health care offsets the reductions.
They would have to acknowledge that their policies imply much higher taxes, deficits or both. Their spending on retirees and health care would certainly be no less than the Republicans’. Plus other spending would be higher. Plus the costs of all those campaign promises (free college, more preschool). Balancing the budget would require tax increases between 20 percent and 25 percent — probably too great to be paid only by the super-rich. Doing nothing would mean increasingly large deficits.
The fight over the debt ceiling is a proxy for this larger collision over government spending. Republicans (or some of them) want to engage; Democrats (or some of them) do not. Both are playing chicken, hoping that the other will be blamed if there’s a default.
Although Republican frustration is understandable, triggering a default would be reckless and destructive. The possible consequences would be perilous. The conventional channels through which a default might harm the economy are familiar. Consumer and business confidence might suffer, lowering spending; interest rates might increase, hurting investment and adding to the federal debt.
But the real damage would lie elsewhere. America’s global reputation would suffer. The role of U.S. Treasury securities as the world’s safest financial instruments would be thrown into doubt, with what effects no one knows. The economic climate might become more cautious and risk-averse, because a U.S. default, even if brief, would qualify as yet another event — like the financial crisis — that was thought impossible. Indeed, another financial panic can’t be ruled out.
We have enough real problems; we don’t need to make new ones. Default should not be an option.
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