Update 202 — Defusing a Fiscal Bomb The Debt Limit: Truce & Accountability
Last Wednesday, at the same oval office meeting with Congressional leaders where the famous fiscal deal extending the debt ceiling deadline was struck, President Trump spontaneously floated the idea of eliminating the debt ceiling altogether. The idea hit a chord with Sen. Schumer and a “gentlemen’s agreement” to seek a repeal of the statutory debt limit was reached.
The issue would pit Trump, Schumer and House Minority Leader Nancy Pelosi against Republican leaders Paul Ryan and Mitch McConnell. What explains this alignment, which differs from the fiscal deal coalition? Who benefits from the law as it stands and who would gain from its repeal? Is repeal plausible, or advisable?
The Debt Ceiling
The President, Sen. Schumer, and Cong. Pelosi appear poised to develop a plan to scrap the debt limit over the next three months. This would change a century-long bedrock of American fiscal policy. The expressed function of the debt ceiling is to limit the amount of debt the Treasury is allowed to assume to pay the government’s obligations.
It is essentially a tool of convenience created during the first World War to allow the Treasury to borrow money and dispense payments without constantly seeking Congressional approval. While the power of the purse still absolutely lies in the hands of Congress, this allows the treasury to pay off obligations already codified into law without forcing Congress and the president to pass a new bill.
The limit was introduced to serve as a checkpoint in the legislative process to consider the impact and implications of our spending and borrowing practices, but there may be safer and more practical ways to do this.
A Shift in Politics
The deficits and the debt ebb and flow from public attention. In the 1992 presidential election Ross Perot secured 20 percent of the popular vote by casting dire forecasts about the national debt. The issue was still salient over 1995-96, when then-Speaker Gingrich threatened to refuse to raise the limit when President Clinton opposed Republican spending cuts. After disappearing from public view, debate on the debt limit re-emerged in 2010 with the Tea Party tellingly attacking Democrats for being taxers and spenders.
Today, there is an evident shift in the nation’s politics on the debt. While the freedom caucus is still strong, the deficits and the debt were muted issues in the 2016 campaign. Spending cuts and tax increases aren’t the nation’s priorities. Perhaps only a Republican president could repeal the debt limit (just as some say only a Democratic president could credibly reform welfare). And President Trump is a friend, if not the King, of debt, don’t forget.
Debt Ceiling’s Recent History
• Debt Ceiling a Successful Political Tool
Debt ceiling brinksmanship exploded rather spectacularly during 2011 when congressional Republicans, energized by the emergence of an insurgent Tea Party movement, declared they would not authorize an increase to the debt ceiling unless President Obama agreed to major cuts to government programs. After weeks of negotiations, a frighteningly close brush with default, and a downgrade of the country’s credit rating, President Obama finally conceded and agreed to the Budget Control Act of 2011 which ended up cutting spending by $1.2 trillion. It was a major victory for those who would use the debt limit as a means to extract concessions from government programs.
• Calls to Eliminate the Debt Ceiling
Democrats have recently shown some interest in eliminating the debt ceiling altogether. After the tumult of 2011, three House Democrats introduced legislation to permanently kill the debt ceiling. The move gained little traction in a Republican controlled House fresh off forcing concessions in the form of the BCA.
The issue has also been on Sen. Schumer’s wishlist since at least 2013, when he proposed to permanently scrap the debt ceiling. Sen. McConnell rejected Schumer’s proposal out of hand, arguing that it would give then-President Obama a “blank check” to increase spending. But with the GOP in control of Congress and the White House, the shoe is on the other foot now.
Real World Headline Risk & Costs
A 2013 study found that most economists favor scraping the ceiling for the simple reason that breaching the debt limit altogether would spike interest rates, delay government payments. There is no tangible benefit to observing it. And any vestigial value the limit might retain as a beacon or call to fiscal accountability is now seriously outweighed by the danger that a U.S. debt default would mean for the global economy.
The debt limit does not constrain spending or encourage tax hikes nor was it designed to. But it barely serves as a speed bump in budget debates. And even the debates have real world costs and other consequences.
For example, Treasury Secretary Mnuchin has already had to suspend the sale of state and local government series bonds, which makes it more costly for states and cities to manage their finances. The Treasury has to pay higher yields to borrowers. Note that these costs are incurred just by approaching the limit.
Other Means to Fiscal Accountability
Congress should consider repealing the debt limit and allow the Treasury to fund programs and obligations without hysteria. Borrowing money for spending priorities is not an irresponsible or harmful proposition and sometimes is cost effective, such as in a low-interest rate environment. There may be times when paying down debt is responsible or prudent, and others where borrowing money to rebuild crumbling, or flooded, infrastructure is the way to increase productivity and strengthen their nation.
Eliminating the debt ceiling would be costly for fundamental GOP interests on spending. Republicans have long used debt ceiling votes as an opportunity to bash government spending and call for spending cuts and to kill legislation it finds undesirable. The elimination of the debt ceiling would neuter this form of anti-government activism, weakening the anti-government base. It is no surprise, therefore, that Speaker Ryan and Leader McConnell are opposed to this arrangement. The two leaders have essentially been left in the dark as the president pursues triangulation.
Eliminating the debt ceiling empowers Democrats at the bargaining table. Without a debt ceiling in place, Democrats do not have to overcome such a significant GOP power lever every time an arbitrary deadline is approaching. Democrats are less disadvantaged advocating for critical entitlement programs in budget negotiations. Sen. Schumer has pushed for the elimination of the limit for the last four plus years.
With what could be the last-ever extension of the debt limit, the president, the Senate minority leader, and the House minority leader have given themselves three months try do away with the debt ceiling at long last.