Dump the Debt Ceiling

The U.S. hit its debt ceiling this Monday. It’s time for Washington to stop the insanity and act responsibly. Congress shouldn’t increase the debt ceiling; instead it should just abolish it.

Drive a stake through its heart and dump it into the Arabian Sea. Just do whatever it takes to spare us and future generations all this asininity. And yes, voting to authorize a couple trillion dollars in federal government spending (like Congress did just a few short weeks ago) but then giving the government the ability to raise only 60% of the necessary funds is nothing short of asinine. Even if it were not only possible but also desirable to cut federal spending very abruptly by 40%, the proper constitutional way to do that would be for Congress to pass a 40% smaller budget rather than let the executive branch set national budget priorities by picking and choosing which 60% of the authorized expenditures will actually be spent.

The federal debt ceiling is utterly redundant, since Congress already has the sole constitutional power to authorize any federal spending. Even if Congress were concerned about the remote possibility of the Treasury borrowing a lot of cash just for the fun of it and piling it in the White House basement (since there’s no way it can be spent on anything without explicit permission from Congress), there would be ways to prevent that without any debt ceiling -- by authorizing the Treasury to issue new debt only as long as the amount of cash on hand does not exceed the current federal budget. The mere fact that the debt ceiling serves no useful function should be more than sufficient reason to repeal it.

But in fact the debt ceiling is not merely useless – it is potentially harmful. It encourages and enables unhelpful grandstanding by politicians. Some of them even live to regret it: our current president recently had to repudiate his own demagoguery from a few years ago when the previous administration was seeking to increase the debt ceiling. So why not just eliminate this generator of public cynicism and embarrassment for politicians? More importantly, the games politicians play with the debt ceiling may one day end up seriously harming the country. And I’m afraid there is a fair chance that day will come quickly. Treasury Secretary Geithner claims that failure to increase the debt ceiling soon may cause a double dip recession, and, unfortunately, he may be right.

Deficit spending currently amounts to an almost unprecedented double digit percentage of the GDP. Its abrupt elimination in our current situation would surely cut the GDP by at least a few percentage points, and in effect would likely lead to a recession. Yes, I know that in general Keynesian arguments should be taken with a grain of salt because the government allocates resources less efficiently than private entities. So if the government just increased taxes on business and spent the proceeds to stimulate the economy with more spending, the net effect might well be negative. But that’s not what’s happening right now. Even debt financed government spending could fail to stimulate the economy if more government borrowing pushed interest rates up and made it more difficult for businesses and consumers to borrow. But, again, that’s not what’s happening right now.

There’s not much evidence that government borrowing soaks up a lot of money from the economy that otherwise would be used more productively. In fact, a lot of companies are sitting on piles of cash that they are not investing and banks are sitting on piles of cash that they are not lending. There’s no rational reason to believe that such business behavior would change for the better if only the government reduced its spending (and, therefore, demand for goods and services).  The opposite is likely true: in effect, private investment would likely decrease along with the decrease in government spending. So it is even possible that balancing the budget right now might cause not merely a recession, but a depression.

But besides the immediate dire consequences, there are going to be unpleasant long-term consequences. Ironically, if the debt ceiling is not increased or abolished promptly, government spending is virtually guaranteed to increase in the long term. Many Republicans now argue that the government is perfectly capable of avoiding a default, but that’s really an argument about semantics. In an imperfect personal finance analogy, the argument amounts to saying that even if you stop paying your electric, gas, water, phone and cable bills, as long as you keep making your mortgage payments, you are not defaulting on anything. That may technically be true, but that doesn’t mean that in such a situation you aren’t going to suffer some nasty consequences in both the short and long term. The government made a lot of promises to pay, and not only to bondholders, but also to contractors, vendors, retirees, employees, veterans and others. A lot of those promises to entities other than bondholders also happen to be legally binding. Just because a failure to pay on some particular obligation may not technically constitute a default, doesn’t mean there will be no real consequences.

Even if all bondholders are paid on time, the government’s cavalier attitude with respect to meeting other obligations may not escape the attention of the bond markets. If interest rates increase because of that not only will the cost of national debt servicing increase significantly, but the cost of debt for private entities (including consumers) will increase too. But even if the bond markets just shrug it all off (and that’s a very big “if”), government contractors and vendors will surely have to factor in the possibility of having to wait for months for their invoices to be paid. So everything will be more expensive for the government (including the already fast growing Medicare and Medicaid). Government employees (including the military) will have to factor in the possibility of abrupt layoffs or delayed paychecks, and so payroll costs will go up.

In the spirit of bipartisanship, here’s some unsolicited advice for the Obama administration: send apologetic letters to all Social Security recipients in congressional districts of Republican freshmen. Tell the seniors that now that the government has reached the debt ceiling, the Social Security Trust Fund is currently unable to redeem special Treasury bonds that it holds and that therefore no new Social Security checks will be sent until the debt ceiling is increased. If the recipients wonder when that might happen, they can call their Representative and ask.

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