Trying to keep the lid on federal borrowing with a statutory debt limit is like trying to manage your weight by refusing to buy bigger pants.
Neither actually works because both are forms of performative discipline. Each involves an expression of hard-nosed determination, but neither involves any actual hard work.
Ultimately, if you want to avoid packing on the pounds, you have to limit the doughnuts and maximize your time at the gym. And if you want to constrain federal debt, you have to limit government spending and increase tax revenues.
There is no substitute for doing the work.
Now in theory, tight pants and limited borrowing authority might motivate some hard work. You can judge for yourself whether holding onto those pants from college has inspired any healthy habits over the years.
But it’s self-evident that the debt limit has failed to curb federal borrowing. In October America’s gross national debt reached $31 trillion, an all-time record. It shows every sign of rising further — an upward trajectory that grows even more worrisome every time interest rates tick upward.
The solution to America’s debt problem isn’t simple, but it starts with something pretty straightforward: Abolish the debt limit.
That suggestion may seem counterintuitive. If rising debt is the problem, ditching the debt limit can’t be the answer. Even a bad limit has to be better than no limit at all, right?
Well no, actually. The debt limit is actively bad for two important reasons.
The Debt Limit Is Misleading
First, it’s misleading. It gives the impression of fiscal responsibility without the reality of actually being fiscally responsible. In doing so, it allows politicians to grandstand about their devotion to budgetary rectitude while absolving them of the need to actually pass responsible budgets.
Genuine fiscal responsibility doesn’t depend on capping the amount of money the government can borrow. It depends on limiting the gap between tax revenues and spending programs.
This observation is not new: Franklin Roosevelt made the same point in 1941 as he urged lawmakers to consider scrapping the debt limit. “The Congress, by making appropriations and levying taxes, in fact, controls the size of the debt regardless of the existence of a statutory debt limit,” he said. “If the Congress, subsequent to the establishment of a statutory debt limit, makes appropriations and authorizations which require borrowing in excess of that limit, it has, in effect, rendered that prior limit null and void.”
Roosevelt understood that debt doesn’t just magically appear; it’s a function of previous tax and spending decisions. Treasury Secretary Janet Yellen understands that basic fact, too. The debt ceiling, she told Congress last year, has no useful place in the budget process.
“I believe when Congress legislates expenditures and puts in place tax policy that determines taxes, those are the crucial decisions Congress is making,” Yellen said. “And if to finance those spending and tax decisions it is necessary to issue additional debt, I believe it is very destructive to put the president and myself, as Treasury secretary, in a situation where we might be unable to pay the bills that result from those past decisions.”
Which brings us to the second big problem with the debt limit.
The Debt Limit Is Dangerous
The debt limit can’t prevent lawmakers from spending too much or taxing too little; those decisions are unconstrained by the statutory limit on borrowing.
But the debt limit can force the United States to the brink of financial disaster — and it regularly threatens to do just that. If lawmakers refuse to raise the debt ceiling when the need arises, the Treasury Department can find itself unable to pay the nation’s bills; prohibited from borrowing enough to cover the obligations that Congress has already approved, the government can be forced to default.
No one is quite sure what would happen if the United States actually defaulted, but it certainly wouldn’t be good. A 2021 study by Mark Zandi of Moody’s Analytics suggested that a prolonged standoff over raising the debt limit would be a calamity, costing 6 million Americans their jobs and destroying $15 trillion in household wealth.
Would Congress ever be stupid enough to refuse a necessary increase in the debt ceiling? Historically, lawmakers have threatened to unleash disaster but have always backed down. But in recent years, the threats have become more common and, to my ears, more credible.
Right now, lawmakers are issuing threats again. Contemplating their new majority in the House of Representatives, Republicans are insisting that they will use the debt limit as leverage, forcing the Biden administration to trade an increase in the ceiling for some collection of GOP priorities.
For example, Rep. Jason Smith, R-Mo., has promised to use “every legislative opportunity — including the debt ceiling — to combat rising prices, to strengthen our economy, to secure our border, to repeal the 87,000 new IRS agents Democrats are hiring to target American families, to make America energy independent, and to right-size the federal government.”
There’s an “or else” implied somewhere in that statement. There has to be: Leverage only works when it comes with a credible threat. In this case, the threat involves unthinkable economic pain for the entire nation.
No one knows exactly when this dangerous showdown is likely to occur. According to estimates from the Bipartisan Policy Center, the moment of truth will probably arrive sometime in the latter half of 2023. Having exhausted all the “extraordinary measures” it uses to cope with exhausted borrowing authority, Treasury will stop paying the nation’s bills, or at least some of them: The United States of America will default on its obligations.
And to what end? So the two parties will compromise on IRS funding and a few other hot-button issues? Or more grandly, arrive at a bargain that solves the nation’s long-term budgetary problems? The same ones they’ve been avoiding so adroitly these past 50 years or so?
There are better, and more plausible, ways to resolve gridlock in Washington. Catastrophe is not the crucible of progress.
So let’s start by abolishing the dysfunctional anachronism that makes catastrophe possible in the first place. The debt limit serves no useful purpose — but still manages to hold the potential for extraordinary harm.