Debt is bad (all else equal). But not everything that purports to control debt is good.
There are spending cuts and tax increases that would be counterproductive. There are budget process proposals that would tie the Congress in knots for no real gain. And then there is the statutory debt limit.
After approving separately every individual debt issuance until World War I, the Congress simplified and streamlined debt finance by setting a dollar limit. It made some sense, although the Department of Redundancy Department might question why the Congress, having voted to spend money, should then be required to vote again to allow the issuance of the public debt that results. Some might wonder whether the opportunity to vote for gratifying spending programs and tax cuts that increase the debt, and then to refuse to vote to honor that debt, might confront the Congress with the temptation to play both sides of the political street – to the detriment of the full faith and credit of the United States of America.
One might also note a peculiarity of the precise statutory definition of our debt subject to the limit. It includes the amounts of non-marketable Treasury “special certificates” in the federal government’s more than 100 trust funds. In the best of times, those trust funds will accrue surpluses – and therefore, the federal government’s debt subject to limit will tend to go up, not down. Consider the late 1990s, the happiest period in modern federal fiscal history. If the budget had stayed on the track that was anticipated as of February of 2000, the Treasury over the succeeding four-plus fiscal years would have continued its then-current practice of buying back outstanding public debt in the open market, and by the end of 2004 would have retired almost $900 billion of public debt. It also by 2004, paradoxically, would have violated the statutory debt limit (see the following chart). So to put it mildly, the debt limit is a highly imperfect measure of the nation’s fiscal behavior.
Despite all that, there are some who favor anything that purports to advance budget discipline, under any circumstances. And one argument for the debt limit that is heard with some frequency these days is that it is an “action-forcing event,” such that – by unstated implication – it has motivated all of the major budget deals of the last 30 or so years. Circumstantial evidence supports this implication. Experience and analysis don’t.
In fact, the debt limit – over the last 20 years – is an action-forcing event that has forced no action. Rather, it has posed enormous risks to the financial well-being of our nation. It is not an opportunity to be exploited, but rather a bullet to be dodged.
What about the argument that all of the major budget deals of the last three decades have been achieved through negotiations over the debt limit? Well, it isn’t true. Consider some facts:
The first post-World War II increase in the debt limit occurred in August of 1954. In the 706 months since, the debt limit has been increased 84 times. That is an average of one debt-limit increase about every 8.4 months. (Take out the last debt-limit increase of the surplus-rich 1990s and the months that followed, and you have one debt-limit increase on average every 7.8 months.) To be sure, those pieces of legislation were not evenly spaced in time over those decades. But the truth remains that it is not surprising that the debt has been close its ceiling when there is a major budget bill in the works, because the debt always is close to its ceiling.
A piece of circumstantial evidence that is summoned to argue that negotiations over the debt limit have led to budget deals is that major budget laws have included debt-limit increases. The fallacy here is to imply causation. The truth is that major budget deals have been enacted because the nation has been in fiscal peril, debt limit or no debt limit. But the debt limit in and of itself entails such serious financial peril, and increasing it is so politically difficult (it sounds so irresponsible to raise the debt ceiling), that whenever a budget deal is reached, providing as it does at least some cover by embedding or even hiding the debt-limit increase in a much larger bill, the Congress takes advantage of that opportunity.
To clarify and emphasize, let me make reference to some paper – the infamous Washington “talking points” art form – that cites the 1993 deficit-reduction law as raising the debt limit. The talking points explicitly argue that therefore a President “negotiate[d] on [the] debt limit.” However, this example soundly disproves the alleged rule.
First of all, the President did not “negotiate on the debt limit” in 1993 because there was no negotiation. Before the 1993 inauguration, the then-Treasury-Secretary-designate went to the Senate opposition leadership, told them that the President-elect had determined to attack the budget deficit, and asked them to join in a negotiation in pursuit of that worthy goal. He was told, putting it in polite language, to go fish. I relate this history not to make a partisan point; the opposition’s justification was that eight years prior, the Treasury Secretary’s party had refused to join in, and then politically capitalized on, a deficit-reduction reconciliation bill that cut Social Security, and passed after a tough strictly partisan vote [see here]. Clearly, if the nation is ever to solve this problem, we need to stop rewinding the surveillance tape farther and farther to change yet again the verdict on who hit whom first. Rather, we need a conscious decision to cast away the bygones and work together to save the country’s finances, for the benefit of all.
But what this episode does demonstrate is that the Congress does not need a debt-limit nuclear weapon to its head to act on the deficit. And to make that point even clearer:
On February 17, 1993, the President presented his deficit-reduction program in a public address to the Congress. The words “debt ceiling” and “debt limit” were never used, and the concept was never mentioned. That evening, the budget document that presented the program was released to the Congress and the public. It did not use the words “debt limit” or “debt ceiling,” and the concept was never discussed.
I personally was present in all of the Administration’s internal discussion of the deficit-reduction program, and in many of the conversations with Members of Congress. The debt limit was never discussed, except in a solitary passing mention on Capitol Hill that, as long as we all were swallowing so many bitter pills to reduce the deficit and control the debt, we might as well get a debt-limit increase out of the way while we were at it.
In sum, the 1993 budget deal had nothing to do with the debt limit. The people who did it wanted to hold down the debt, regardless of the debt limit. Far from supporting the pro-debt-limit-war talking points, it demonstrates definitively that we, the citizens and our elected policymakers, do not need the debt ceiling to address our fiscal problems. We need only to do our jobs – as voters, and as elected representatives.
The subsequent history goes further to demonstrate why we not only do not need the debt limit to address the budget, but also should not want a debt-limit crisis in the name of fiscal responsibility.
The pro-debt-limit-crisis talking points also cite a debt-limit increase attached to the 1997 bipartisan budget deal as positive evidence. The talking points do not mention the totally fruitless – in fact, highly destructive – 1995-1996 debt-limit crisis that preceded it. Over those years the nation endured federal government shutdowns, amidst threats to push the Treasury to the brink of default (and to impeach the Treasury Secretary for struggling to avert default). It was only two years later, after what was arguably popular disapproval of these tactics – plus what was indisputably a presidential-election rebuke – that the debt-limit crisis was dropped as a political tool and a budget deal was struck. And yes, the 1997 legislation again contained an increase in the debt limit, but no one who was in the room would suggest that the effort was in any way motivated by the debt ceiling.
The talking points in circulation today also cite the automatic spending cuts – the “sequester” – that resulted from the 2011 debt-limit crisis as a demonstration of the merits of debt-ceiling war. I know of no remotely non-partisan budget expert who would agree. The deal cut in the debt-limit crisis was explicitly designed to achieve some different, alternative budget policy; it failed. The sequester imposed excessive unspecified cuts on a small part of the budget (the annual agency appropriations) that is not the source of the problem, while leaving the root cause of the long-term issue (health costs) essentially untouched. In the meantime, the prospect of default by the issuer of the world’s reserve currency, by the estimate of the Government Accountability Office, raised interest rates enough to cost U.S. taxpayers at least $1.3 billion in 2011, and more in future years.
As if we needed one more reason to avoid a debt-limit crisis, please recognize that an urgent debt-limit-increase bill – like any other must-pass legislation – creates opportunities for mischief. If the vote is close – and no one wants to have to explain a vote to increase the debt limit – any legislator can exact his price. It might have nothing to do with the budget. It might even make the budget worse. After all, in for a penny, in for a pound; if I’m going to vote to increase the debt limit, I might as well get that highway overpass in my district.
There has been a deterioration in Washington’s sense of responsibility to the American people that has rendered the debt limit extraordinarily dangerous. Where once there was a firm understanding that any and all partisan differences would in the end be resolved in constructive compromise, there is today instead a willingness to take the well-being of the nation hostage to achieve a personal minority view of the role of government. That willingness is held on both sides of the aisle, which makes it all the more dangerous – a narrow escape the next time could be followed by an even more perilous retaliation the time after next. It also makes it all the more incumbent on the adults in the wheelhouse, from both parties, to keep the ship of state well clear of the rocks.
I will not argue for the repeal of the debt limit, because it would be a colossal waste of breath. No institution with such a well chosen name – from a PR perspective – could ever be removed from the law books. (Perhaps we should re-name it the “Face Up to Your Financial Responsibilities Act.”) But we can try to persuade responsible elected policymakers to do their jobs without resorting to artificial stimulants such as a man-made debt crisis.