May 18, 2011 05:15 PM UTC

The Debt Ceiling is Archaic and Useless

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• by: MADCO

“As far as I am aware, no other country on Earth has the idiotic policy that the United States has of having a legal limit on the amount of bonds the central government can issue,” he writes. “They correctly recognize that the deficit and the debt are simply residuals resulting from the government’s tax and spending policies. It makes no sense to treat the debt as if it is an independent variable.”

Bruce Bartlett, Reagan adviser

Congress has all the budget authority it needs (100%) without having a separately defined debt ceiling.  But in the run up to WW1, Congress wanted to facilitate Treasury issuance of the Liberty Bonds (cute name) to finance the preparation for war. So they set a debt ceiling, and gave the Treasury autonomy to issue Liberty Bonds up to the ceiling.  It worked but was never repealed.

But in every budget cycle, every single one, Congress gets to decide whether the debt will go up (deficit) or down (surplus) or stay the same (balanced).  The ceiling isn’t necessary.  

Btw, just in case anyone is stopped here, wondering how Congress gets to make that determination, it’s not that complicated in theory.  Congress looks at projected expenditures and revenues, sets tax rates, and gets what they get.  The projections are usually not 100% correct, but they are usually pretty close.

If Congress wants to make the debt smaller, they need to create  a budget surplus. If they want to keep the debt under the current ceiling, they need to balance the budget (since we’re at the ceiling now).  When the US is this close to the ceiling, and Congress  passes a deficit budget , like they recently did, they have already said they want the ceiling to go up.  

The Treasury (and others involved) are not concerned about the USA”s ability to pay, but our willingness.  If we create even the perception that we are willing to default, or unwilling to keep up, we will pay a high price for that.

Any posturing now about not raising the ceiling, is just political posturing. And normally I wouldn’t care. It’s political hay as spectator sport and doesn’t matter. Usually.  But now it’s dangerous.

But there is a large contingent of newbies and others on the Hill who appear to be serious about not increasing the debt ceiling. I suspect (and sincerely hope) that cooler heads will prevail, but meanwhile for each trading day that the ceiling stays where it is, the uncertainty factor increases.

Uncertainty is expensive for the borrower – US Treasury, i.e., us.

And that;s part of the danger.

The biggest danger, of course, is that the ceiling is not adjusted and results in a US default.

“The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. Leadership means that ‘the buck stops here.’ Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership.”  Senator Obama,  2006

Philosophically correct, but ultimately political bs.  The Congress passed a 2005 and 2006 budget that were in deficit.  No one was surprised when the debt reached the ceiling.  

Bashing Obama for saying that then, and urgning Congres to get it together now misses the point. Bash away to prove you are not serious about a  solution to the “debt problem.”  Draw your own arbitrary line in the sand and defend to the death of the country.  Or at least the long term negative impact of the country.

If the US defaults- we never have – it will have several immediate and long lasting negative impacts.  At a minimum, borrowing will become more expensive, ie, interest rates will rise.  

The US Treausry issues bonds.  The financial markets define the  interest rate on those bonds as the risk free rate for good historical and socio-political reasons. For appropriate economic  reasons.  But if we default it won’t matter much to the our lenders (anyone who buys those bonds) that it was momentary political posturing, that it was used a political opportunity to force an ideological debate. They will price our default accordingly.  And it will cost us more. For a long, long time.

The idea of a grand showdown on spending had long been a staple of conservative analysis. Even before Reagan’s inaugural, he had been approached by one prominent conservative who urged him to force a showdown over the debt ceiling and simply refuse to sign on to one until the Democratic Congress reined in its spending plans. Reagan rejected this idea with a comment I wish I had understood better at the time.

The conservative activist who told me that story was convinced that Reagan would have won such a showdown. For fifteen years I agreed with him, but I was to learn something about the American people that too many conservatives don’t appreciate. They want their leaders to have principled disagreements but they want these disagreements to be settled in constructive ways. That is not, of course, what our own activists were telling us. They were all gung ho for a brutal fight over spending and taxes. We mistook their enthusiasm for the views of the American public.   Newt Gingrich: Lessons Learned the Hard Way (1998)  

“We mistook their (conservative activists’) enthusiasm for the views of the American public.”

It’s easy now in hindsight to conclude, what a maroon. But the GO(T)P appears to be making the same mistake now.  Raising the debt ceiling is not a failure or one party, nor a victory for the other.  It’s a math equation.

And adult leadership needs to increase the ceiling, have whatever budget battle they want to have and pass the budget for 2012.