Keep the debt ceiling

“Manufactured crisis” is the term going around to describe the near-failure of Congress to raise the debt ceiling. Mitch McConnell says that we can expect more of them in the future. It’s not surprising that big-government types want to get rid of the debt ceiling altogether, but even some of the cool people are getting in on the action. “Get rid of the debt ceiling, for God’s sake,” says Scott Sumner. “Now more than ever the debt ceiling has to be permanently removed,” says Adam Ozimek. I’m not for manufactured crises, but this seems like a severe overreaction that would have really bad long-run consequences.

The argument for getting rid of the debt ceiling goes like this: Congress has already approved federal spending. Increases in the debt ceiling merely authorize the executive branch to spend what the legislative branch has ordered it to spend, so it is redundant. Furthermore, Congress has now discovered that the debt ceiling can be used as a source of gridlock (or “hostage-taking” or “terrorism,” depending on how shrill you want to get). Most governments don’t have debt ceilings; they work just fine. So the debt ceiling creates an opportunity for political opportunism and pointlessly increases our risk of a big crisis.

This argument strikes me as shockingly naïve. First of all, to get rid of the debt ceiling would be to vastly expand the power of the executive branch. The US Constitution lists borrowing as an Article I power. “The Congress shall have Power…To borrow Money on the credit of the United States.” Giving the executive branch the power to borrow on the credit of the US whatever it interprets to be necessary could have terrible consequences. For instance, current Constitutional jurisprudence seems to give Congress the authority to declare war, but no mechanism by which to undeclare war. Wars end when the executive branch says they end. However, at present Congress can at least de-fund a war. If the debt ceiling were eliminated, once war had been declared, the executive branch could prosecute it basically forever, even if Congress disapproved. The president could borrow whatever money was necessary to do all the spending that Congress ordered, plus the money for the war. And when you factor in that the Obama administration seems to have blatantly ignored the War Powers Resolution in its action in Libya, this should be cause for serious alarm among anyone with even a modicum of sense. The left especially, which complained incessantly about expansions of executive power during the Bush administration, if it has any principles left should oppose giving the executive branch any freer rein.

Furthermore, it’s simply not true that every Congress approves of all federal spending. Congress passes a discretionary budget every year, but much of federal spending is “mandatory,” meaning it is not subject to the ordinary how-a-bill-becomes-a-law process. On entitlements, for instance, some past Congress approved a given path of spending, but the current Congress can only change that path if they can override a presidential veto (or induce a non-veto). Assuming no veto-overrides, to cut discretionary spending, you need both houses of Congress. To cut entitlement spending, you need both houses plus the President. So the structure of the spending power is in fact different with discretionary versus “mandatory” spending. Faced with an executive branch that opposes cuts to entitlement spending, Congress will never be able to cut spending if they cannot force a cut through the debt ceiling. If all federal spending were discretionary, then there would be some merit to the claim that the debt ceiling is redundant; since some spending cuts are subject to a presidential veto, the debt ceiling provides an important non-redundant tool to force those cuts.

More generally, I would remind people that decreasing the holdout problem with respect to spending increases the holdout problem with respect to cutting spending. If you agree that the US needs to drastically cut entitlements over the medium term (i.e., if you are paying attention), you should want to decrease the holdout problem for spending cuts, not for spending increases.

So what about the severe crisis that will result if the US bumps up against the debt ceiling, gets downgraded, or delays payments? I agree that this will be a manufactured crisis, but those who favor spending more seem to deserve as much, if not more, of the blame as those who oppose borrowing more. But it seems the biggest blame should be laid at the feet of those who make our economy so fragile with respect to a single security. The best way to avoid a crisis in the future is to take steps now to make financial institutions more robust. First, eliminate rules that will trigger huge sell-offs of T-bills if when the US loses its AAA credit rating. Eliminate the favorable tax treatment of debt and improve the tax treatment of equity (I facetiously call this “Islamic banking lite”). Allow checkable brokerage accounts. Increase the average maturity of US debt to give the government some leeway with respect to seigniorage in the event the crisis occurs.

And of course, the ultimate solution to the debt ceiling issue is to spend less. Even if you oppose cutting spending during a recession, it’s hard to justify a debt ceiling that is as high as the US’s. If the output gap of a recession is 8 percent of GDP for 4 years, even if there is no monetary stimulus, that justifies a debt ceiling that is 32 percent of GDP, not 100 percent or more. In reality, there can be more monetary stimulus and fiscal stimulus is pretty ineffective, so even 32 percent of GDP seems like excessive borrowing across the business cycle.

My bottom line is that the US is a big, diverse economy. As it has gotten more diverse, interests have come into greater conflict. The result will be either gridlock in Congress, consolidation of executive branch power, or devolution of power to local authorities (at which scale there is less conflict) and the market. We should take this last path, and the quickest and least painful way to get there is to keep the debt ceiling and make smart reforms to spending and the financial system. Eliminating the debt ceiling will ensure that power continues to be consolidated and that spending will be harder to cut.