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.