Raise The Debt Ceiling? Let’s Eliminate It Instead
The Trump Administration is warning Congress that we will need to raise the debt ceiling by September. Congress should take this as an opportunity to eliminate it entirely.
Treasury Secretary Steve Mnuchin is warning Congress that the United States is likely to reach the limits of the current debt ceiling in the coming months:
WASHINGTON — Treasury Secretary Steven Mnuchin informed congressional leaders on Friday that the government could run out of money in early September, pleading with lawmakers to reach a deal to raise the government’s borrowing limit before their August recess or risk a potentially catastrophic default.
Mr. Mnuchin, in a letter to leadership, said that while “it is impossible to identify precisely” how long the Treasury’s resources can last, updated predictions indicated that “there is a scenario in which we run out of cash in early September, before Congress reconvenes.”
“As such,” Mr. Mnuchin wrote, “I request that Congress increase the debt ceiling before Congress leaves for summer recess.”
He and Speaker Nancy Pelosi of California have spoken by phone multiple times this week, including a 20-minute conversation on Friday afternoon, about federal spending caps and raising the debt ceiling to prevent governmentwide spending cuts. They agreed that they would most likely speak again over the weekend, according to a Democratic leadership aide.
“I am personally convinced that we should act on the caps and the debt ceiling,” Ms. Pelosi told reporters on Thursday evening, in between phone calls with the Mr. Mnuchin. “Prior to recess.”
Negotiations between lawmakers and administration officials on Capitol Hill have intensified, as the threat of what could be a disastrous fiscal crisis grows closer. There is little appetite for what could be a politically tense stand-alone vote to raise the debt ceiling, and lawmakers do not want to approve a stopgap spending bill that keeps the money flowing for a year but does not reflect Congress’s changing priorities.
But only a handful of working days remain for both chambers before the August break.
“I am very concerned that time is running very short,” said Senator Susan Collins, Republican of Maine and a member of the Senate Appropriations Committee. “The last thing I want to see is either a government shutdown or a one-year continuing resolution.”
The idea of a one-year continuing resolution, the congressional term for a short-term spending bill, has been widely panned on Capitol Hill, with 15 Senate Republicans sending a letter this month urging administration officials to avoid it.
But with divided government, the fate of a deal largely rests with Ms. Pelosi, who will have to wrangle the moderate and liberal factions of her majority, and President Trump, who has proved to be an unpredictable factor in spending negotiations.
“It’s time that we got serious on a bipartisan basis to try to work this out and not have the kind of chaos that goes along with our inability to come together on these kind of important issues,” said Senator Mitch McConnell, Republican of Kentucky and the majority leader, at a news conference on Tuesday.
The federal government has already run a $747 billion budget deficit for the 2019 fiscal year, which ends in September — a 23 percent increase from the year before. That is an unusually large increase given the strength of economic growth.
Total personal and corporate income tax levels are down slightly from the previous year, Treasury Department statistics show. Federal spending has risen — particularly for national defense and health care programs — and so have the interest costs on the growing national debt. Those trends reflect Washington’s free-spending ways and the rising costs of an aging population as the baby boom generation draws Social Security and Medicare benefits.
Those dynamics have yet to prompt a renewed interest in the deficit, but they are intensifying pressure on lawmakers to raise the debt limit — or risk economic catastrophe if they do not.
A 2018 budget deal in Congress suspended the limit, which constrains the amount of money the government may borrow to continue paying its bills, until this past March 1. Once that deadline passed, the Treasury Department was forced to begin employing “extraordinary measures” in order to maintain the borrowing needed to keep paying soldiers, issuing Social Security checks and otherwise funding the government.
Those measures include premature redemption of Treasury bonds owned by federal employees’ retirement accounts, borrowing cash set aside to smooth exchange rate fluctuations and stopping contributions to some government pension funds.
Mr. Mnuchin’s letter is a warning that those sleight-of-the-balance-sheet efforts cannot last forever. When the Treasury Department runs out of them, it will not have enough money coming in to pay its spending obligations. That would necessitate either sharp and immediate spending cuts, or a government default on some of its obligations — not paying workers, contractors, lenders or citizens it owes money to.
Economists generally warn that such a default would at minimum destabilize the economy and raise future government borrowing costs. In a worst case, it could shock the economy into recession
After a debt ceiling crisis that nearly brought the country to the brink of default in the summer of 2011 after the GOP had taken control House, the issue of the debt ceiling has mostly faded into the background of the ongoing fiscal debate on Capitol Hill. To a large degree, the credit for this goes to Republican leadership in the House and the Senate that had apparently decided that it would not allow itself to be held hostage by the House Freedom Caucus and other groups that sought to use the debt ceiling debate as a means of forcing budget cuts or other measures that had nothing to do with the debt ceiling itself. On some occasions, this has been accomplished by increasing the debt ceiling itself, on others, it has been accomplished via measures that effectively suspended it for a given period of time.
That last extension passed, as noted, at the beginning of March and in the time that has passed the Treasury Department has worked around the debt limit via accounting measures and other means. These measures have allowed the Federal Government to continue spending even though the limits of the debt ceiling had technically speaking been breached. Those measures, however, can only last so long and, as Mnuchin notes in his letter to Speaker Pelosi, we will likely reach the point where those measures will no longer be feasible in September, which also happens to be the month during which Congress must pass a new budget for Fiscal Year 2020. This is why Mnuchin is asking Congress to deal with this matter prior to leaving for a six-week summer break at the end of July.
Instead of kicking the can down the road again, though, Congress should use this as an opportunity to take the one step that would guarantee that we’d never have a debt ceiling crisis ever again. I am speaking, of course, of the idea of eliminating the debt ceiling entirely.
The idea of eliminating the need for frequent debt ceiling votes is not a new one. Economists and political pundits on both sides of the aisle have argued for some time that placing a legislative limit on the Federal Government’s ability to pay its bills and float debt when necessary makes no sense either politically or economically. From a political point of view, it gives Congress far too much power over the Executive Branch in general and Treasury Department policy and procedures specifically by requiring an Administration to continually seek Congressional permission to do something that, at least ostensibly, appears as though it ought to be far more discretionary than current law allows it to be.
Economically, the fact that the debt limit has frequently become a bargaining chip in broader power struggles between Congress and the White House over fiscal policy introduces an element of uncertainty into the economy that makes financial markets nervous and potentially could have a negative impact on both bond and stock values as well as the value of the dollar and on international trade. As we saw during the debt ceiling showdown in the summer of 2011, such showdowns also have a negative impact on the economy generally and have even led rating agencies to downgrade their quality assessment of U.S. Government bonds and Treasury Bills. Finally, the existence of a debt ceiling also hands legislative minorities an inordinate amount of bargaining power in that enhances their ability to extract concessions at a time when passing legislation extending the debt ceiling is most essential.
Opponents of past proposals to eliminate the debt ceiling argue that eliminating the debt ceiling would lead to an explosion in debt that would be catastrophic for the economy, but this argument is undermined by reality in several key respects. Primarily, of course, there’s the fact that the existence of the debt ceiling has done little to control the explosion of either the annual budget deficit or the increases in the national debt that have become commonplace. The national debt has essentially doubled under the Presidencies of every President going back to Ronald Reagan, with the only exception to that rule being George H.W. Bush since he only served for four years. This occurred notwithstanding the fact that the issue of raising the debt limit has been debated on yearly, semi-yearly, or more frequent intervals throughout the time each of these men was in office. Clearly, then, the existence of a law requiring Congress to vote on a debt ceiling limit did nothing to control the growth of the national debt. Additionally, it’s worth noting that the United States did not have a debt ceiling law until 1917, and the reasons for it coming to existence are fairly interesting:
The debt ceiling was first enacted in 1917. Why? The date tells all: we were about to enter the Great War. To fund that effort, the Wilson government needed to issue Liberty Bonds. This was controversial, and the debt ceiling was cover, passed to reassure the rubes that Congress would be “responsible” even while the country went to war. It was, from the beginning, an exercise in bad faith and has remained so every single second to the present day.
Clearly, the existence of a debt ceiling law has done nothing to slow the growth of national debt and instead appears to have increased the pace of its growth over the course of the 100 years that it has been in effect. Given that, there appears to be little good reason to keep it in effect now. The fact that debt ceiling has done nothing to stop the growth of the National Debt really shouldn’t be a surprise because that’s basically what it is intended to do:
Judging from the NY Times coverage of the 1917 episode, legislators paid little attention to the implications of mandating a ceiling. They focused instead on Treasury Secretary McAdoo’s request for a higher borrowing limit so as to fund an expensive war effort. The ceiling was created to empower, not rein in, Treasury (prompting a failed effort to create a congressional committee to oversee Treasury’s actions). Similarly, the creation of the aggregate ceiling in 1939 reflected congressional deference to Treasury, granting the department flexibility in refinancing short term notes with longer term bonds. As the Senate floor debate makes clear, senators viewed the move as removing a partition in the law that hampered Treasury’s ability to manage the debt.
In other words, the debt ceiling law was intended to take the issue of the issuance of Federal Debt out of the hands of Congress, and place it in the hands of the Treasury Department in order to make it easier for the Federal Government to issue debt. More importantly, the debt ceiling is not the way to control either Federal spending or the growth of the Federal government. For that to happen, Congress needs to exercise restraint where it matters, at the appropriations stage where the Federal Government and its various departments are granted the authority to spend money, to begin with.
Congress already possesses the authority to authorize any Federal spending that is necessary to pay for the nation’s obligations. If Congress were truly concerned about the level of the national debt, it would focus not on the borrowing power of the Treasury Department, but on the fact that it continues to authorize massive increases in spending at all levels of government on programs of dubious merit. Additionally, the law as it currently exists does little other than to allow politicians on both sides of the aisle to pander to interest groups and voters back home by claiming that the voted to control spending because they voted against a debt ceiling increase. If they were truly interested in controlling spending, they would act at the point when it matters, when Congress is actually voting on the budget and on the appropriations bills for the various parts of the government itself. The fact that they choose the route of grandstanding over doing something that would actually have an impact on Federal spending and the growth of government should give the reader all the information they need to determine their true intentions.
As a political matter, of course, it’s unlikely that the political will exists in Congress exists to eliminate the debt ceiling, especially since such a move can easily if improperly, be spun into a move that will increase the debate. As we’ve seen, though, that isn’t the case and, more importantly, the history of the 102 years or so during which a debt ceiling has existed has seen the largest increase in public debt in American history. Therefore, the idea that the debt ceiling can control spending is simply untrue.
In the end, it’s likely that the Republicans and Democrats on Capitol Hill will find a way to quietly raise the debt ceiling just as they have in the past. Before we get there, though, it’s looking like we may have to put up with another showdown between Members of Congress who recognize that authorizing the Federal Government to pay the bill for things that Congress has already authorized it to spend money on and the debt kamikazes who think that playing with the financial integrity of the nation is a way to advance their political position.