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How to Prevent Another Debt Ceiling Crisis

Monday, October 28, 2013

Replacing a debt limit with a debt-burden limit makes both economic and political sense for the GOP. It would help keep spending in check and promote economic growth.

A civil war is ravaging the GOP, and the root cause is the debt ceiling — an economic doomsday device mentioned nowhere in the Constitution, but nonetheless used periodically by one group of politicians or another to score political points.

If Republicans were to think outside the debt-limit box, they could avoid this unnecessary civil war.

The debt limit, as currently defined, sets up what would be an abrupt shock to the system, a granite wall that limits total federal debt to a fixed dollar number. When the debt reaches that number, government is prohibited by its own law from paying all of its own bills. Presumably, the lower-priority bills would be the ones left unpaid, but that begs the question: which bills are "lower-priority"? (Government contractors? Housing subsidies? Military pensions? Social Security obligations? Congress hasn't debated and defined such priorities yet.) As wise as it might be to prioritize government spending programs, the proper time for Congress to do that is during budget deliberations — not during the short-run, smoking aftermath of an abrupt crash into the debt-limit wall.

Besides, haven't we already experienced a sufficient number of abrupt financial crises for at least a generation or two?

We'd be replacing the obsolete ‘debt clock’ with a new ‘debt affordability meter.’

Fortunately, there's a viable alternative to the debt limit. This alternative would automatically keep spending in check, promote economic growth, and de-weaponize the debt ceiling. Instead of a "debt limit," it is a "debt-burden limit." Instead of a maximum dollar limit on the federal debt, it is a maximum ratio of debt relative to the size of the economy. Instead of a hard stop at a specified level of debt, it is a gradual increase in pressure on the brakes when a measure for the affordability of debt reaches a specified danger level.

How would a "debt-burden limit" change our perceptions? First, it would shift our focus from the absolute size of the debt to our ability to afford the debt we have. We'd be replacing the obsolete "debt clock" with a new "debt affordability meter." Second, it would force our politicians to start quantifying the economic growth their spending and tax programs would supposedly generate. Anyone who understands grammar-school fractions understands that when the economy grows faster than the federal debt does, the debt burden (ratio of debt to GDP) drops, even though the debt grows. The faster the economy grows, the safer the reading on the affordability meter. 

Today, the ratio of debt to GDP is substantially below its high-water mark of 120 percent after World War II; it has also been holding steady in recent months because the economy's growth has been keeping up with debt growth. That situation could change, of course, but it illustrates the main point: the debt level and the debt burden are not only two different things, they can move in opposite directions. It also underscores an important truth: growth is the best way to reduce any given debt burden. And the best way to give growth the attention it deserves is to build it into our measure of the debt burden.

Instead of a hard stop at a specified level of debt, it is a gradual increase in pressure on the brakes when a measure for the affordability of debt reaches a specified danger level.

Fortunately, building a measure of economic growth into the measure for the debt ceiling would play to Republicans' strong point: fostering robust growth by trusting and enabling private sector enterprise and innovation. That's why Republicans should end their civil war and propose a bold alteration to the debt limit: the new measure would be the ratio of federal debt to GDP, a measure that would be a function not only of spending and taxation, but also of their growth effects. Lastly, the debates about where and how to draw the "danger limit" line (for the debt-to-GDP ratio) and how to prioritize spending programs would be lengthy ones, but would also be the most worthwhile debates on Capitol Hill in recent memory.

Because the debt ratio would actually improve when the economy grew at a faster pace than the federal debt, debt-ceiling crises would become less frequent — especially if Congress prioritizes spending programs ahead of time and creates a mechanism for spending adjustments whenever their specified danger-limit debt ratio was breached.

Business-savvy Republicans understand the difference between a debt level and a debt burden. A debt limit is like an idiot light; a debt-burden limit is like a barometer. Currently, we use an idiot light that virtually guarantees a crisis-to-crisis process rife with danger and ripe for political grandstanding. Switching to a barometer would get us out of frequent-crisis mode and elevate economic growth in the public debate — a bonus that Republicans should welcome.

Will business-savvy Republicans step forward with such a bold change? We should hope so, because the next idiot-light debt-ceiling crisis is only a few months away.

Steve Conover retired recently from a 35-year career in corporate America. He has a BS in engineering, an MBA in finance, and a PhD in political economy. His website is www.optimist123.com.

FURTHER READING: Conover also writes “Putting the Debt in Context,” “A Business Perspective on the Federal Debt,” “The Tea Party and the Debt Ceiling vs. Economic Growth,” and “How to Reduce the Debt Burden for Future Generations.” Stan Veuger contributes “Three Lessons Republicans Should Learn from the Debt Ceiling Debate” and how to “Demilitarize the Debt Ceiling.” John Steele Gordon explains “Debt and the Constitution” while Arnold Kling shares “16 Tons of Keynesian Economics” and “Lenders and Spenders: Confronting the Political Reality of Debt.” James Pethokoukis asks “Does the Fed Really Have a 'Hidden Agenda' to Hide the Cost of U.S. Debt?” and sits down with economist David Beckworth on “Is the Fed Going to Ruin the U.S. Economy? Again?

Image by Dianna Ingram / Bergman Group

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