Let's Eliminate the Debt Limit

By :: July 18th, 2011

My latest column at the Christian Science Monitor:

America's leaders need to get to yes on a budget deal – one that marries substantial deficit cuts with a much-needed increase in the debt limit.

But that's not enough. Rather than merely increasing the debt limit, we should eliminate it.

I realize that sounds strange. With all the Sturm und Drang in the budget talks, you might think that the debt limit is essential to controlling Washington's profligate ways. It's not.

Washington has other tools for managing its finances. The annual budget process includes a series of steps by which Congress decides how much to spend and to collect in taxes. Those decisions determine the size of America's deficits and debt.

That simple fact often gets lost in the debate, so let me say it again: When Congress decides how much to spend and how much to tax, it is also deciding how much to borrow.

Unfortunately, the debt limit allows lawmakers to pretend that they can separate the two. Members routinely try to wrap themselves in the flag of fiscal responsibility by voting against debt limit increases. In most cases, though, those members have also voted for spending and tax policies that make those debt increases necessary.

Votes on the debt limit thus usually reflect raw politics, not substantive policy differences. Everyone knows that the debt limit has to rise. But they also know that voters hate debt. So law-makers jockey to see who can win the right to vote no and who must bear the burden of voting yes.

Democrats opposed debt limit increases when President George W. Bush was in office and Republicans controlled Congress. Republicans returned the favor under President Obama and the Democratic Congress. The only times we've seen hints of bipartisanship are when, as now, divided government has placed some responsibility on both parties.

A larger problem is that the debt limit institutionalizes risky brinkmanship. In divided government, both parties must agree to raise the debt limit. If they don't, the United States can't pay all its bills. We might even default on our debt. That's the economic equivalent of driving over a cliff.

Both sides would regret that outcome. But they face very different incentives. The party that holds the White House has to make sure that the government functions. That's why Treasury Secretary Timothy Geithner has repeatedly warned Congress about the damage that would result if the debt limit isn't raised in time.

But the opposing party wants to extract the highest possible price for agreeing to more debt. So they have to act as though hitting the limit is no big deal. That's why many Republicans have been discussing the potential to prioritize payments (putting interest first), and some have flirted with endorsing temporary default.

The problem with that strategy is that negotiations can fail, prioritization might not work, or we might be surprised with a sudden need for funds. In short, we might accidentally go over the brink.

Even if we don't, dancing on the edge is costly. Alone among major nations, the US talks openly about the possibility of default. Financial markets usually discount that rhetoric as mere politics. As the deadline nears, however, that rhetoric will sow doubt in financial markets, inspire warning shots from credit-rating agencies, and potentially increase our borrowing costs.

There's no reason to subject ourselves to those needless costs. The debt limit is an anachronism. Congress should eliminate it.

P.S. In conjunction with the eliminating the debt limit, I would strengthen the existing budget process along the line the Bipartisan Policy Center’s SAVEGO proposal. We do need budget procedures to force action, just not the brinkmanship of the debt limit.

P.P.S. Reuters reports that Moody’s is also recommending the elimination of the debt limit.

4Comments

  1. Nadia Hassan  ::  7:57 pm on July 18th, 2011:

    One alternative is tying debt limit hikes to budgets, but yeah it is interesting. In focus groups, the GOP has found voters think of debt limit hikes as raising a credit card limit. But Larry Summers raised an interesting analogy:he and his daughters disagree on spending and who pays for what, but refusing to pay the Visa is not an option.

    I think this column bears out why that’s a fair and accurate analogy. When members of Congressng budget, they are committing to paying people for government services. Refusing to follow through is like refusing to pay a credit card bill.

  2. Michael Bindner  ::  11:35 pm on July 18th, 2011:

    Garrett Epps and Bruce Bartlett, among others, think that the limit is unconstitutional, and getting rid of it would take no legislation at all. Geithner, however does not seem to agree. If Congress thought he did, they would quickly raise the limit – if only to keep the leverage to do a deal (like Gramm-Rudman-Hollings worked so well – all it really did was set up for the recession that had Bush not do enough and be run out of office by an emoting Bill Clinton.

  3. Ralph H  ::  10:59 am on July 19th, 2011:

    I hate to disagree, but we have a ticking time bomb in the ever rising debt. While the current Washington charade is obviously disfunctional, it at least is a highly visible warning sign. I will admit to being pretty blind to the debt in my last 25 years of taxpaying, but unless we get a handle on the riaing debt, we will have the same problems as Greece, Ireland and others. The pain will be less the earlier we address the issue.

  4. Around The Dial – July 20, 2011 | South By North Strategies, Ltd.  ::  3:02 pm on July 20th, 2011:

    […] TaxVox argues for eliminating the debt limit. […]