It’s a simple equation: Congress decides how much tax revenue the government will collect and how much money the government will spend. When the first sum is insufficient to cover the second, the government must borrow to make up the difference. To rein itself in, Congress sets a "debt ceiling," a predetermined amount the government can borrow and can’t exceed without a vote.
That ceiling, now set at $14.3 trillion, was shattered May 16, and Congress has until Aug. 2 to find a way to avoid default. Today, the House conducted an up-or-down vote on increasing the limit by $2.4 trillion. With House Republicans not wanting to show that they would facilitate an increase in government spending, the measure failed, as everyone expected it to. Still, Republicans saw the vote as an opportunity to demonstrate their "seriousness."
Debt limit battles tend to be dangerous and demagogic. Mainly, though, they are unnecessary: The limit itself has no plausible rationale and should be done away with. At best, it’s an anachronistic contrivance; at worst, it’s a crude instrument for budgetary theatrics, which only hurt taxpayers in the end.
Before 1917, Congress had to approve individual loans or debt instruments issued by the Treasury. The Second Liberty Bond Act, enacted to help finance World War I, gave the Treasury wider latitude to borrow within an aggregate constraint (a debt limit), thus giving it more independence from Congress. Over the following decades, however, Congress began using this limit as a way "to assert its constitutional prerogatives to control spending," as the Congressional Research Service put it in a 2008 report.
Of course, the rational way for Congress to assert its constitutional prerogatives would be to not spend more money than it has. Unfortunately, Congress doesn’t have a great record in this regard. Instead, it opts to legislate its way to progressively higher debt ceilings. The routine usually goes something like this: The government approaches the debt limit, the political posturing about spending begins, warnings are issued that interest rates will rise if an agreement isn’t reached -- and then the ceiling is raised.
Great theatrics don’t necessarily make for great policy. Rather than creating a short-term crisis, Congress would do better to focus its energies on achieving medium-term budget reforms, such as the sensible and flexible ideas suggested by the Bowles-Simpson debt-reduction commission.
Risk of Instability
Republicans, who have been demanding budget cuts in exchange for raising the ceiling, say their goal is simply to squeeze as much savings as they can for taxpayers. The harder they press, though, the more likely they are to extract something else: higher borrowing costs for the government. After all, the longer this drama goes on, the greater the risk of instability, higher interest rates and even default.
So far, the bond market has shown no sign of nervousness, in part because it’s seen it all before and in part because the Treasury keeps extending the date by which it will exhaust financial gimmicks and must declare default. Republicans use this apparent lack of concern as evidence that they should push for "structural reforms" before agreeing to raise the debt ceiling again. The only appropriate structural reform is to take a legislative mechanism that does little for policy and lots for point-scoring, and to abolish it altogether.
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