Tuesday, May 30, 2023|
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The recurring farce of lifting the US government debt ceiling began again this week. As total debt surpasses $31.4 trillion — the current statutory limit — the Treasury is undertaking a series of bookkeeping maneuvers to disguise new borrowing and keep the government operating. At some point, these methods will be exhausted. If Congress doesn’t vote to increase the limit, new borrowing could be halted and outright debt default is possible.
The farce demands that this dire result gets headed off at the last moment, but it might be unwise to take this for granted. A system that envisages the mere possibility of a self-inflicted default proves that, when it comes to fiscal incompetence, the US Congress leaves no path unexplored. When this pantomime was last played through almost to the end, in 2011, default was indeed avoided — but financial markets were destabilized, the country’s credit rating was cut, and taxpayers faced nearly $20 billion in additional borrowing costs.
It should hardly need saying that this malpractice ought to stop.
Defenders of the current rules say that debt-ceiling negotiations provide at least a semblance of fiscal discipline. One analysis found that every major deficit-reduction deal between 1985 and 2011 resulted from such fights. Yet if the debt limit was ever an effective tool, it no longer is: Debt has increased to roughly 95% of gross domestic product (not counting intragovernment obligations), up from 78% in 2019. That figure is on track to keep rising. Pressure on Congress to restrain government borrowing might very well be needed, but the nuclear option of a threatened default is partly self-defeating. People assume it won’t happen, which serves to neutralize the deterrent effect — until one day, by accident, it does.
Avoiding such a needless disaster should be a priority. Once the debt ceiling is reached, and the creative accounting is all exhausted, payments that service government debt should be required to continue. The rules could specify automatic cuts in other spending and increases in taxes sufficient to avoid new borrowing. That might well involve shutting down much of the government and interrupting vital programs — an adequately dramatic outcome to exert some discipline, should that be necessary, but not so grave that it would be seen as all but impossible. In other words, a more effective deterrent.
To be sure, some more thoroughgoing reforms to fiscal policy would be preferable. Congress could, for instance, replace the limit on the nominal value of debt with one defined by the ratio of debt to national income (a far better measure of fiscal sustainability). It might change the hard limit to a threshold that triggers gradual, not sudden, remedial measures. It could revive and strengthen “PAYGO” provisions that match revenue to increased spending. It should certainly avoid blockbuster “omnibus” spending bills and restore the largely abandoned process of actually analyzing budget proposals before enacting them.
Even if such ideas continue to go nowhere, Democrats and Republicans can surely agree on two things. First, public debt cannot safely be allowed to keep rising at the projected rate. Second, purporting to solve this problem by threatening to default on the country’s obligations is nuts.
— Bloomberg Opinion
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