Demilitarize the Debt Ceiling
And there we are: Victory! The debt limit has been raised. After weeks and weeks of open conflict, intense infighting, and yes, some passive-aggressive sitting around as well, the President and Congress have managed to avert U.S. default and reopen the federal government. The PandaCam is back! Plus, a global financial crisis has been averted or at least postponed, and all should be pleased.
Or should they?
Republicans, of course, fought tooth and nail to gain concessions from the president in this combined standoff over government funding and the debt limit. The federal government went into slimdown, and GOP poll numbers took a sizable hit.
What have Republicans gotten out of this?
A clean continuing resolution, a clean debt-limit increase, and a budget conference committee. The first two of those three items were certainly not the object of heated desire burning in the hearts of Tea Party members everywhere. The third item, going to conference on the budget, had been readily available since May, and House Republicans steadfastly rejected it. A generous interpretation would count the continuing resolution at sequester levels as a win, but only by starting to negotiate a month ago without putting any demands on the table could Republicans have not gotten that quasi-concession. Next time we go into this process, Republicans should probably adopt more reasonable initial positions, and they should not persuade themselves that the debt limit is a weapon that is comfortably wielded.
But enough about this CR/debt limit deal: let us look at the future ahead of us, and where the debate on these budgetary issues would ideally take us. Two questions seem particularly salient: can we avoid future debt-limit crises? And how do we put the United States on a sustainable long-run fiscal path?
First, the debt limit. Yes, I’ve also grown pretty tired of it. On February 7, less than four months from now, the Treasury Department will once again run out of the borrowing capacity needed to continue paying for the spending appropriated and mandated by Congress. Hopefully this time Congress will live up to its responsibilities and not wait till the eleventh hour to create more borrowing capacity. Even better would be a transition from mere hope to comfortable knowledge, by implementing a structural mechanism to avoid the self-inflicted economic harm that debt limit brinkmanship bring.
The debt limit, when first passed by Congress in 1917, was meant to facilitate the work of the Treasury Department. Instead of approving individual bonds with their terms and conditions, Congress decided to give the Treasury department the opportunity to assess market demand, exploit the yield curve, and issue a certain aggregate amount of debt in whatever form of shape it wanted. Helpful. Of course, in 1917, mandatory spending had not been discovered yet, government spending did not automatically rise year after year, and major borrowing was really only called for in times of war.
Today’s situation is strikingly different. The lion’s share of federal spending is of the entitlement or mandatory variety. This spending will not come to a sudden end when Germany and Japan surrender, and it will grow automatically as the population ages and inflation does its part. Meanwhile, by setting spending levels higher than tax revenue, Congress has approved deficits for the foreseeable future. The logical consequence of all this is that the national debt will continue to grow. Default would have disastrous consequences, and as we see this week, both parties accept this feature of the empirical reality surrounding us. Raising the debt limit automatically, without damaging sideshows, and raising it the way its raised now, with damaging sideshows, are the options we are left. The former is better than the latter, and a mechanism like the Gephardt rule the House used to operate with, under which the debt limit is automatically adjusted to reflect the spending and revenue implications of legislation, would be a good way to implement it.
The second topic Congress should focus on is the long-run fiscal outlook facing the country. Under realistic assumptions, the Congressional Budget Office project that debt-to-GDP will rise to almost 200 percent by 2038. The bulk of this increase is driven by federal spending on Medicare (and Medicaid, and Obamacare), though Social Security is an important part of the story as well. Most Republicans understand that these programs need reform; it would be extraordinarily pleasing if Rep. Paul Ryan (R-WI) managed to convince his Senate Democrat counterpart in the upcoming budget conference committee, Sen. Patty Murray (D-WA), of this necessity as well. It is unreasonable to cut programs 73-year-olds rely upon for those who have already turned 73, so changes will have to be made well ahead of the moment at which they start affecting people. The meetings of the budget conference committee, awkward as it must be for House Republicans who did not want be a part of it for so long, would be excellent occasions for designing these changes.
So there we are. All kinds of wishful thinking. But who knows? Congress did, after all, gloriously succeed at avoiding default. More victories may be just around the corner!
Stan Veuger is a resident scholar at AEI. His academic research focuses on political economy and applied microeconomics.