Another Day Older and Deeper in Debt…
Thursday, January 13, 2011
Last year, Congress approved a $1.9 trillion increase of the debt limit to support the government's borrowing. This lifted the total amount the federal government could borrow to $14.3 trillion.
Now Congress needs more money, so the debate about the debt ceiling is making the front pages again. This time around, the federal government proposes that it be allowed to borrow an additional $700 billion to pay its bills, which would raise the national debt to $15 trillion (more than the size of our gross domestic product). This would support the federal government's borrowing through 2011.
Democrats spent a lot of money over the last two years, hence the two consecutive increases of the debt limit in just three months in 2009, and the biggest one-time increase of all time in 2010. But Democrats are not the only debt-friendly party. According to the Office of Management and Budget, the federal debt limit has been raised 98 times since 1940—more than once a year, on average. Under President Bush alone, Republicans voted to raise the debt limit by about $5.4 trillion.
When the statutory debt limit was instituted in 1939, its explicit goal was to limit congressional spending.
When the statutory debt limit was instituted in 1939, its explicit goal was to limit congressional spending. Its purpose is supposedly still the same today. Technically, if the debt nears its statutory limit, the Treasury Department cannot issue new debt to manage short-term cash flows or manage the annual deficit. The government may be unable to pay its bills.
This limit actually worked well for a while. The chart below shows increases in the federal debt and the statutory debt limit since 1940. From 1940 to the beginning of the 1980s, the debt and its limit grew slowly.
In the 1980s, however, both the debt and the limit started increasing at a faster rate. Since 2000, the debt limit has been increased ten times; in 2008 and 2009 it was increased twice in the same year. It was increased yet again last year. Now, Treasury Secretary Tim Geithner warns that the debt limit may be met again as early as March 31 this year.
As is frequently the case, lawmakers and pundits are arguing that they have to raise the limit because otherwise the country would default. Consider this recent quote by Austan Goolsbee, the chairman of the White House Council of Economic Advisers.
This is not a game. The debt ceiling is not something to toy with … If we hit the debt ceiling, that’s … essentially defaulting on our obligations, which is totally unprecedented in American history. The impact on the economy would be catastrophic … I don’t see why anybody’s talking about playing chicken with the debt ceiling. If we get to the point where you’ve damaged the full faith and credit of the United States, that would be the first default in history caused purely by insanity.
I agree that this is not a game. This way of reasoning, however, obscures the fact that the need to raise the debt ceiling is merely a symptom of a much bigger problem: Congress has been spending too much money for too long.
The consequences will be dramatic if the government fails to make some serious changes to the way it spends money and borrows money to pay for its daily consumption, if it does not change its practice of paying the interest on its debt by borrowing more and more, and if it continues its practice of making benefit promises it will never be able to deliver. Having to raise the debt ceiling is only a sign that Congress keeps failing to do what is necessary to get the nation’s finances in order.
If lawmakers are going to vote in favor of raising the debt ceiling out of fear of the immediate consequences, they should do it only in exchange for a change in the direction this country is going. For instance, they could vote yes in exchange for a credible commitment to reform Medicare, Medicaid, and Social Security, or in exchange for a solid cap on spending across the board (with no exceptions for pet projects, and applicable to all spending, not just new spending increases). They could also vote yes in exchange for a balanced-budget amendment. Whether it is politically difficult or not, it is a good time for action and change.
Veronique de Rugy is a senior research fellow at The Mercatus Center at George Mason University.
FURTHER READING: De Rugy gives “Two Cheers for Rivlin-Ryan,” says President Obama pulls “A Con Job on Jobs,” argues that the GOP Pledge to America is “Not Much Better Than the Status Quo,” educates us on “Taxes and Presidential Math,” and poses “The Limits of Blaming Bush.”Andrew Biggs, Kevin Hassett, and Matt Jensen suggest “The Right Way to Balance the Budget” while Michael Barone reports, “While His Base Rages, Obama Faces Tax-Cut Reality.”
Image by Rob Green/Bergman Group.