Owing tens of trillions is a problem. Default would be a catastrophe. End the continuing crisis.
By Jason Furman and Rohit Kumar
The Wall Street Journal
June 20, 2017
Over the past eight years, high-stakes negotiations in Congress over the federal debt limit have repeatedly brought Washington to the verge of default. We were on opposite sides of these debates, as senior policy advisers to President Obama and Senate Republican Leader Mitch McConnell, and we continue to disagree about taxes and the proper size of government. Yet we both believe that the statutory debt limit has outlived its usefulness as a mechanism for restraining the size of the national debt. Or, put more precisely, we think that whatever residual value the debt limit may have is far outweighed by the risk that a potential U.S. default poses to the global economic order.
Now the debate is heating up again: The Treasury Department is already taking “extraordinary measures” to avoid going above the debt ceiling, but that can last only a matter of months. Congress will have to act. But this time instead of merely raising the debt limit, lawmakers should abolish it altogether—for the good of President Trump, all his successors and the American people.
The Constitution assigns Congress the power to tax and spend, which determines the annual budget deficit and, therefore, the debt. Separately, the Constitution authorizes Congress to “borrow Money on the credit of the United States.” But what if lawmakers approve spending, and then later refuse to borrow the money needed to satisfy the obligation? The result would be a default: Washington either would stop paying bondholders or would fall short on its other commitments—for example, to disabled veterans or defense contractors or even taxpayers who are owed refunds.
Fortunately, this has never happened. Congress has always met its responsibility to authorize the borrowing needed to pay America’s bills. Over the past several decades, however, lawmakers have made an increasingly regular practice of using the debt limit as leverage, flirting with default as a way to get concessions from the other side.
Until World War I, Congress authorized debt on a case-by-case basis, approving individual bond issues or allowing borrowing for a specific purpose. In 1917, in an effort to make the process more efficient, Congress granted the Treasury the authority to borrow up to a certain limit.
For decades, this system worked effectively. But skirmishes over the debt limit began as early as 1953, when President Eisenhower asked lawmakers to raise the figure. Sen. Harry F. Byrd Sr. , a Democrat from Virginia, led the upper chamber’s Finance Committee to reject the president’s request. Then in 1967 the House, controlled by Democrats, rejected in a floor vote a debt-ceiling increase requested by President Lyndon Johnson.
The challenge of raising the debt limit became even more difficult over the following decades. In 1985 Treasury Secretary James Baker became the first to use “extraordinary measures” to prevent borrowing from hitting the cap. An expanding set of such measures were deployed in 1995-96, 2002, 2003, 2011, 2013, 2014, 2015 and 2017. Now that these measures are used almost annually, it is hard to justify calling them “extraordinary.”
Although the measures mostly involve inconsequential reshuffling in the federal ledger, they can have real-world costs. For example, Treasury Secretary Steven Mnuchin, like several of his predecessors, has suspended the sale of state and local government series bonds. This allows the Treasury to stay below the debt ceiling for longer but can make it more costly for states and cities to manage their finances.
As the debt limit nears, costs mount. In the past, the Treasury has operated with a smaller cash cushion against unforeseen contingencies, has rejiggered bond maturities in ways that interfere with liquidity in the financial system, and has paid higher yields to borrowers worried about timely repayment. At the same time, brinkmanship over the debt limit erodes consumer and business confidence and increases market volatility.
Note that these costs are incurred simply by approaching the debt limit without actually reaching it. In a 1985 letter, President Reagan discussed what would happen if the government did someday teeter over the edge: “The full consequences of a default—or even the serious prospect of default—by the United States are impossible to predict and awesome to contemplate.” During the debt negotiations of 2011, President Obama similarly warned that hitting the limit “would risk sparking a deep economic crisis—this one caused almost entirely by Washington.”
While many countries have limits on the policies that drive debts and deficits, none of them have a history of using the threat of default as a negotiating tool once spending and taxing decisions have been made. Denmark is the only other country with a debt limit on the books, but it is set so high as to be irrelevant.
To meet the obligations set out by Congress, the U.S. will have to raise the debt limit by about $3 trillion over the next four years—and another projected $1 trillion, give or take, each year thereafter. At this pace, the risk is high that negotiations to raise the debt ceiling may fail, with unimaginably severe consequences.
Lawmakers are right to be concerned about steep increases in the debt. But those worries should be expressed when the policies that actually increase the debt are voted on. Once new policies become law, defaulting on interest payments or veterans’ benefits is hardly productive. A new mechanism is necessary to tackle the debt issue—and it must be one that does not prejudge the question of revenue increases versus spending cuts, which is for future Congresses to resolve.
For now, the right move is to eliminate the debt limit permanently. That would let the Treasury focus on the most efficient and effective ways to manage the federal government’s cash flow, giving future presidents, both Democratic and Republican, a freer hand. No matter which party holds the White House, all Americans would benefit from taking the threat of a U.S. default off the table.
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