Thursday, January 19, 2012

What’s the Point of a Debt Ceiling?

It will soon be time for Congress to once again decide whether or not to raise the debt ceiling. It was only last August that Congress debated a similar raise, told markets would collapse if they didn't raise the ceiling, only to watch the market drop precipitously even after the ceiling WAS raised.

Back then, NPR had an economist, a former Federal Reserve member, answer questions from listeners concerning the potential upcoming federal default. As we face another demand to raise the ceiling, it seems like a good time to review...
He answered questions like:
  • What is a default? Is it a default if payments are simply delayed? If principal is paid but not interest? If some but not all principal is paid? Ans: These are all defaults.
  • If Congress can’t raise taxes or raise the debt ceiling to borrow, why doesn’t it pay for federal spending by just printing the money? Ans: The government can’t print money; only the Fed, a nominally independent agency, can print money. And it would lead to significant inflation.
The story mentioned that raising the debt ceiling is not an unusual occurrence. What’s unprecedented is NOT raising it.  It has been raised over 100 times since legislation requiring a debt ceiling was passed in 1917. It’s been raised 8 times in the last decade alone. A vote to raise the debt ceiling has never not passed.
In the last 20 years, the debt ceiling has gone from about $5 trillion to about $15 trillion.
So here’s a question that was never asked, nor answered:
What’s the point of having a debt ceiling if it is always raised, over 100 times since 1917?
Clearly the country managed from 1787 to 1917, 130 years, without any debt ceiling. The government had debt during that period, just no legislative ceiling. A ceiling that always moves farther away as one approaches it is a mirage. So what’s the point of having a debt ceiling? That was the question neither asked nor answered. The one time in almost a century where it is not routinely raised and the governing class is screaming that great devastation will follow… So what’s the point?
Is the point that a debt ceiling shows the world we’re not profligate, that we won’t take on more debt than we can afford? How can it possibly fulfill this function if it is never not raised whenever we approach it?
Is the point that having a debt ceiling creates incentives for spending restraint? But government growth has been MUCH larger from 1917-2011 than it was from 1787-1917. From the pre-Civil War period to just before WWI, government grew from 1.5% of GDP to 5%. From WWI to Obama, government has grown from 5% of GDP to 25%. So the debt ceiling is clearly unsuccessful in creating incentives for spending restraint. 
Is the point that without a debt ceiling purchasers of government debt would have no way of knowing whether or not we thought we could repay what we borrow? That’s too silly a notion to seriously contemplate. If Greece says they can repay their debt, and promises to never take on more debt than what their continually rising debt ceiling allows them to, is everyone supposed to believe them?
Alan Greenspan, former head of the Federal Reserve, commented on Meet the Press in late spring, 2011, that he saw no reason to have a debt ceiling. Greenspan certainly didn’t mean he saw no reason for spending restraint. He merely meant this repeated political theatre, this habitual kabuki dance, this routine wringing of hands and gnashing of teeth, this recurring financial brinksmanship, serves no purpose. With or without a debt ceiling, those who buy our bonds will judge for themselves whether or not we can pay it back. That, not an arbitrary and continually increasing ceiling, is what is important in the end. 

The debate this time around should not be on whether or not to raise the debt ceiling. It should be on whether or not to REPEAL the debt ceiling. The illusion of restraint cannot possibly be fooling anyone any longer. It's time to move on to more substantive debates.


  1. I like the debt ceiling. It puts government spending in the news. I like government shutdowns too. They show us how unless most of the government is.

  2. 'The Congress shall have Power ....

    'To borrow Money on the credit of the United States;'

    That's why there is a debt ceiling, the Constitution requires some formal method of authorizing borrowing.

  3. Well, that would be a silly argument, Patrick, since as I noted in the main post a debt ceiling was created by Congress only in 1917, less than a century ago. Are you suggesting that all Congresses prior to 1917 were acting unconstitutionally? It's not like the Congress of the United States never borrowed money on the credit of the United States prior to 1917. Have you studied 19th century history?

    To be blunt, you have provided literally no evidence--textural, historical, economic, logical--that removing a debt ceiling created by Congress as a matter of statute less than a century ago in any way impacts negatively on Congress' power "to borrow money." And, in all candor, I think that's because it's not possible to cogently make that argument.

  4. Mr. Sullivan is entirely correct. The constitution requires Congress to authorize debt issuance.

    "a debt ceiling was created by Congress only in 1917, less than a century ago. Are you suggesting that all Congresses prior to 1917 were acting unconstitutionally?"

    Of course not. From 1790 to 1917 Congress authorized every separate issuance of debt individually.

    Presumably you didn't know this -- but really, before getting your snark on about others being totally ignorant of history and not citing any sources for their claims, this is the sort of simple fact you should check! Maybe have some sources for your own claims, eh?

    Checking facts this simple isn't hard. Even if you don't have a law degree and have never read a history book, you still have Google -- and you said that you listen to NPR:

    During WWI authorizing each bond issue separately become impossible. The debt ceiling was adopted as a form of Congressional authorization that was *easier* to use -- pre-approved total authorization, so to speak.

    When you ask "What’s the point of having a debt ceiling if it is always raised?", *this* is the point: It is the easiest form of constitutionally required Congressional authorization. Any *other* purported purpose you might imagine is just in your imagining, based on no evidence or legal or historical source material.

    If you don't like the debt ceiling procedure, fine -- provide your own preferred alternative method of Congressional authorization. Perhaps the old way of Congress authorizing each bond issue separately? Or writing separate borrowing authorization into each spending authorization bill? (Note well: authorization to spend is *not* authorization to borrow.)

    Whatever -- you must propose some alternative method of providing Congressional authorization to borrow, to meet the constitutional requirement.

    OR ... yes, sure, you can just argue that this constitutional requirement is "obsolete" and so should be ignored, like the Tenth Amendment. Hey, Obama's people think parts of the constitution are obsolete and should be ignored too, at the moment especially regarding Obamacare. You can get together and make common cause with them to throw out parts of the Constitution that you all think are so old-fashioned that they just get in the way of things.

    Though for someone of Libertarian bent, wanting to kill Congress's constitutional power over borrowing seems damned peculiar. Think of the increase in unchecked executive power that would result.

    War Powers: Today the President can already start a war by himself -- if he could put the cost of it on the national credit card with nobody else having a say about it ("all legal spending authorizes whatever borrowing may be needed") he'd have two-thirds of the war power of a Roman Emperor.

    National security powers: Today spending on national security "black ops, secret security, secret actions, weapons development" etc, is already hidden from Congressional and public review by secrecy. Let the President put them on the national credit card without limit, and then the executive branch can create, authorize, operate, and pay for them without limit and without review by anybody. That's three-thirds of the power of a Roman Emperor. Is this a good Libertarian agenda?

    The Founders placed a lot of emphasis on "separation of powers" to protect liberty, and they explicitly denied the power of borrowing to the executive and gave it to the Congress.

    For today's libertarians to strip that power from the Congress and shove it back over to the executive just for the convenience of making politics run more smoothly ... I'm not sure the Founders would approve. :-(

    "in all candor, I think that's because it's not possible to cogently make that argument."