The debt-ceiling circus in Washington continues as I write this. The Republicans seem bound and determined to ruin the “full faith and credit” of the United States, while President Obama is frustrated that the Republicans won’t accept his deals to cut Social Security and Medicare. None of this is necessary. We don’t need a debt ceiling. It’s absurd. It’s counterproductive. It’s self-destructive.
James Surowiecki of The New Yorker writes (emphasis is mine):
The truth is that the United States doesn’t need, and shouldn’t have, a debt ceiling. Every other democratic country, with the exception of Denmark, does fine without one. There’s no debt limit in the Constitution. And, if Congress really wants to hold down government debt, it already has a way to do so that doesn’t risk economic chaos—namely, the annual budgeting process. The only reason we need to lift the debt ceiling, after all, is to pay for spending that Congress has already authorized. If the debt ceiling isn’t raised, we’ll face an absurd scenario in which Congress will have ordered the President to execute two laws that are flatly at odds with each other. If he obeys the debt ceiling, he cannot spend the money that Congress has told him to spend, which is why most government functions will be shut down. Yet if he spends the money as Congress has authorized him to he’ll end up violating the debt ceiling.
As it happens, the debt ceiling, which was adopted in 1917, did have a purpose once—it was a way for Congress to keep the President accountable. Congress used to exercise only loose control over the government budget, and the President was able to borrow money and spend money with little legislative oversight. But this hasn’t been the case since 1974; Congress now passes comprehensive budget resolutions that detail exactly how the government will tax and spend, and the Treasury Department borrows only the money that Congress allows it to. (It’s why TARP, for instance, required Congress to pass a law authorizing the Treasury to act.) This makes the debt ceiling an anachronism. These days, the debt limit actually makes the President less accountable to Congress, not more: if the ceiling isn’t raised, it’s President Obama who will be deciding which bills get paid and which don’t, with no say from Congress.
What happens if they don’t vote to raise the debt ceiling? Nobody knows. There’s lots of scenarios. It all depends on how crowds of people react and how those same crowds think the others in the crowd will react. It’s unpredictable. Interest rates might go up, they might go down, they might stay put. Two things are for sure, though. There will be lots of trading and uncertainty in financial markets with increased volatility. And more important, if a default translates into the government actually spending significantly less money next month than now, then GDP is for sure going down. Any government spending cut of greater than 10% immediately puts us back into recession – maybe even less.
So what’s really going on? Well both the Republicans in Congress and President Obama are trying to accomplish non-budget goals that they can’t do by normal means. Both are trying to radically scale back aspects of government that are too popular to do head-on. They’re trying to cut Social Security, cut Medicare, raise the age on Medicare, change Obama’s healthcare plan, and other things that polls show are very popular. So they’re trying to do it under cover of “having to for the debt”. Except that they don’t have to do it. The debt-ceiling law is totally unnecessary and contrived.