It's Groundhog Day Over the Debt Ceiling

By :: October 2nd, 2013

If you recently heard the news that Congress is debating the merits of raising the debt ceiling, don't think you have time-traveled back to 2011 or to 2012. In the absence of Congressional action, and barring some extraordinary measures, the debt ceiling is set to be breached sometime in the next several weeks, and the U.S. stands to gain nothing by not raising it.

The debt limit "debate" is not about limiting the size of government, entitlement reforms, or tax reform. The proof of that is that there are no major items like that on the table right now.

Instead, Republicans in Congress are yet again debating whether Congress should authorize the government to pay for spending—wait for it—that Congress has already authorized the government to undertake! Yes, it really is that silly of a situation.

It is also cowardly—if the Republicans don't want the spending to occur, they should specify the spending cuts, not put the United States in a literally impossible position by saying "you must spend this amount of money, but you are not authorized to finance that spending via taxes or borrowing." When other countries authorize spending, they typically proceed by implicitly authorizing the increase in borrowing needed to fund such spending. Of the advanced economies, only Denmark has a mechanism like our debt ceiling, and it has never been used as a negotiating tactic for spending cuts.

While it is difficult to predict the precise magnitude and composition of the economic effects of hitting the debt ceiling, it is clear that the effects will not be good ones. At the broadest level, creating a politically manufactured crisis that threatens the full faith and credit standing of government debt hardly seems like a smart or patriotic thing to do. In recent testimony to Congress, my Tax Policy Center colleague Donald Marron (of the Urban Institute) noted that not raising the debt ceiling (or even toying around with the idea) could raise interest costs, and create economic uncertainty thus hurting the ailing economy.

The U.S. recently suffered economic costs just by flirting with the idea of not raising the ceiling. The debt ceiling showdown of 2011 has been estimated to have cost taxpayers $1.3 billion for that fiscal year and $18.9 billion over 10 years.

Actually hitting the debt ceiling would result in either a default or reduction in spending. If the U.S. were to default on its debt, even for the short-term, the economy could suffer the negative consequences. As Donald Marron has pointed out, the United States defaulted on some Treasury bills in 1979, and this small technical default caused T-bill interest rates to increase by about 60 basis points and remain elevated for at least several months thereafter. The effect of a sustained debt ceiling breach on interest rates could be significantly larger this time around. And with debt equal to 70 percent of GDP now, the overall effects of interest hikes could be substantial. Moreover, an increase in government rates will raise other interest rates on other lending that is keyed to Treasuries.

Cutting more spending from this weak economy would not be a smart strategy. CBO recently estimated that repealing the sequester could create between 0.3 and 1.6 million jobs in the third quarter of 2014 as well as increase real GDP growth by 0.2-1.2 percent.

The political craven-ness of Republican resistance to raising the debt ceiling can be seen by the fact that, even if the recent Republican House of Representatives budget had been enacted, we would still have had to raise the debt ceiling, if not now, then in short order, because even their budget proposes a significant increase in government debt.

If Republican members of Congress seem to be willing to allow the government to hit the debt ceiling, it may be because Republican voters want them to. A recent Washington Post - ABC poll showed that 61 percent of Republicans survey would support "Congress not raising the debt limit and letting the government default on paying its bills and obligations." This held even though 66 percent of the Republicans surveyed agreed that if the government "cannot borrow more money to fund its operations and pay its debts... it would cause serious harm to the U.S. economy." This is, to put it mildly, an odd set of opinions to hold simultaneously.

While Republican Congressmen and voters seem willing to negotiate over the full faith and credit of the U.S. government, in the end, the debt ceiling should simply be raised to pay for spending that Congress has already authorized and not used as a tactic that could hurt the United States, with no apparent gains.

4Comments

  1. Leslie  ::  12:18 pm on October 2nd, 2013:

    When a person puts their foot in their mouth, they do not have a leg to stand on.

    When they put both feet in their mouth they stand on their ass.

    And then, when they shoot themselves in the foot, I stand clear.

    In this case, for the Republicans, absolutely no gun control, please!

  2. Michael Bindner  ::  2:29 pm on October 2nd, 2013:

    This is an artifact of the days when Congress itself issued individual debt obligations, as per the Constitution. While the size of the debt prevents that now, Congress has never given up on this as a power.

    Some might regard raising interest rates as a good thing, especially retirees who are getting no return right now. Others, who are of a libertarian bent, are hoping for some kind of economic and political collapse and the advent of liberty because of it – although the experience of the Weimar Republic should be enough to convince them that such collapses lead to authoritarianism, not freedom.

    Given the full faith and credit clause in the 14th Amendment, the President should take the hint and declare that the limit itself is unconstitutional, eliminating this issue forever.

  3. AMTbuff  ::  3:34 pm on October 2nd, 2013:

    “Cutting more spending from this weak economy would not be a smart strategy.”

    Is either party proposing that in this debate? Republicans have proposed repeal of the medical devices tax. The other proposals have delayed effects on spending. Also, where was this Keynesian argument when Obama won his tax rate increase last time?

    As to why anyone might be willing to risk default, I posted this 2 weeks ago:

    Holding the debt limit hostage is a desperate act, appropriate only for a desperate situation. Is our failure to take any reasonable steps to control our debt and deficit a sufficiently desperate situation? Reasonable people can disagree on that.

    Our political system is structurally biased toward more spending, running up unpayable government debt, and eventual default or hyperinflation. If one is serious about stopping this, and neither party is right now, what other tactics are available? If a massive default is inevitable, is it really all that horrible to provoke a smaller default now?

  4. Tax Roundup, 10/3/2013: Three-day shutdown retroactively responsible for ID theft! And… standards! « Roth & Company, P.C  ::  9:29 am on October 3rd, 2013:

    […] William Gale, It’s Groundhog Day Over the Debt Ceiling […]