Dump the Debt Ceiling

May 16th, 2011 at 11:09 pm | 46 Comments |

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The U.S. hit its debt ceiling this Monday. It’s time for Washington to stop the insanity and act responsibly. Congress shouldn’t increase the debt ceiling; instead it should just abolish it.

Drive a stake through its heart and dump it into the Arabian Sea. Just do whatever it takes to spare us and future generations all this asininity. And yes, voting to authorize a couple trillion dollars in federal government spending (like Congress did just a few short weeks ago) but then giving the government the ability to raise only 60% of the necessary funds is nothing short of asinine. Even if it were not only possible but also desirable to cut federal spending very abruptly by 40%, the proper constitutional way to do that would be for Congress to pass a 40% smaller budget rather than let the executive branch set national budget priorities by picking and choosing which 60% of the authorized expenditures will actually be spent.

The federal debt ceiling is utterly redundant, since Congress already has the sole constitutional power to authorize any federal spending. Even if Congress were concerned about the remote possibility of the Treasury borrowing a lot of cash just for the fun of it and piling it in the White House basement (since there’s no way it can be spent on anything without explicit permission from Congress), there would be ways to prevent that without any debt ceiling — by authorizing the Treasury to issue new debt only as long as the amount of cash on hand does not exceed the current federal budget. The mere fact that the debt ceiling serves no useful function should be more than sufficient reason to repeal it.

But in fact the debt ceiling is not merely useless – it is potentially harmful. It encourages and enables unhelpful grandstanding by politicians. Some of them even live to regret it: our current president recently had to repudiate his own demagoguery from a few years ago when the previous administration was seeking to increase the debt ceiling. So why not just eliminate this generator of public cynicism and embarrassment for politicians? More importantly, the games politicians play with the debt ceiling may one day end up seriously harming the country. And I’m afraid there is a fair chance that day will come quickly. Treasury Secretary Geithner claims that failure to increase the debt ceiling soon may cause a double dip recession, and, unfortunately, he may be right.

Deficit spending currently amounts to an almost unprecedented double digit percentage of the GDP. Its abrupt elimination in our current situation would surely cut the GDP by at least a few percentage points, and in effect would likely lead to a recession. Yes, I know that in general Keynesian arguments should be taken with a grain of salt because the government allocates resources less efficiently than private entities. So if the government just increased taxes on business and spent the proceeds to stimulate the economy with more spending, the net effect might well be negative. But that’s not what’s happening right now. Even debt financed government spending could fail to stimulate the economy if more government borrowing pushed interest rates up and made it more difficult for businesses and consumers to borrow. But, again, that’s not what’s happening right now.

There’s not much evidence that government borrowing soaks up a lot of money from the economy that otherwise would be used more productively. In fact, a lot of companies are sitting on piles of cash that they are not investing and banks are sitting on piles of cash that they are not lending. There’s no rational reason to believe that such business behavior would change for the better if only the government reduced its spending (and, therefore, demand for goods and services).  The opposite is likely true: in effect, private investment would likely decrease along with the decrease in government spending. So it is even possible that balancing the budget right now might cause not merely a recession, but a depression.

But besides the immediate dire consequences, there are going to be unpleasant long-term consequences. Ironically, if the debt ceiling is not increased or abolished promptly, government spending is virtually guaranteed to increase in the long term. Many Republicans now argue that the government is perfectly capable of avoiding a default, but that’s really an argument about semantics. In an imperfect personal finance analogy, the argument amounts to saying that even if you stop paying your electric, gas, water, phone and cable bills, as long as you keep making your mortgage payments, you are not defaulting on anything. That may technically be true, but that doesn’t mean that in such a situation you aren’t going to suffer some nasty consequences in both the short and long term. The government made a lot of promises to pay, and not only to bondholders, but also to contractors, vendors, retirees, employees, veterans and others. A lot of those promises to entities other than bondholders also happen to be legally binding. Just because a failure to pay on some particular obligation may not technically constitute a default, doesn’t mean there will be no real consequences.

Even if all bondholders are paid on time, the government’s cavalier attitude with respect to meeting other obligations may not escape the attention of the bond markets. If interest rates increase because of that not only will the cost of national debt servicing increase significantly, but the cost of debt for private entities (including consumers) will increase too. But even if the bond markets just shrug it all off (and that’s a very big “if”), government contractors and vendors will surely have to factor in the possibility of having to wait for months for their invoices to be paid. So everything will be more expensive for the government (including the already fast growing Medicare and Medicaid). Government employees (including the military) will have to factor in the possibility of abrupt layoffs or delayed paychecks, and so payroll costs will go up.

In the spirit of bipartisanship, here’s some unsolicited advice for the Obama administration: send apologetic letters to all Social Security recipients in congressional districts of Republican freshmen. Tell the seniors that now that the government has reached the debt ceiling, the Social Security Trust Fund is currently unable to redeem special Treasury bonds that it holds and that therefore no new Social Security checks will be sent until the debt ceiling is increased. If the recipients wonder when that might happen, they can call their Representative and ask.


Recent Posts by Andrew Pavelyev



46 Comments so far ↓

  • Bunker555

    Andrew, you’re too logical for the Tea Baggers. Your apologetic letter idea is exactly what’s going to happen.

  • mikewaz

    In the spirit of bipartisanship, here’s some unsolicited advice for the Obama administration: send apologetic letters to all Social Security recipients in congressional districts of Republican freshmen. Tell the seniors that now that the government has reached the debt ceiling, the Social Security Trust Fund is currently unable to redeem special Treasury bonds that it holds and that therefore no new Social Security checks will be sent until the debt ceiling is increased. If the recipients wonder when that might happen, they can call their Representative and ask.

    That’s cold-blooded. I can’t imagine President Obama would be that callous and, well, evil.

    That said, we absolutely should get rid of the debt ceiling. Aren’t we the only first-world country that has a debt ceiling? It’s a completely counter-productive anachronism that, like you said, allows people to grandstand about how they’re responsible and their so-called enemies are not.

    • Bunker555

      +1 mikewaz

      No more Mister Nice Guy from the President. He’s going to hit back hard and do whatever it takes to win in 2012. Boehner has painted himself into a corner, and the flea baggers have to be appeased.

  • rbottoms

    Dump the GOP, an even better solution.

    • Bunker555

      There’s no free lunch. He’s pumped it, and now doesn’t know how to dump it. He’s getting Tea Bagged, so to speak.

  • Moderate

    This is an excellent idea. Mr. Pavelyev is rapidly becoming my favorite non-Frum writer on this site.

  • pnumi2

    I’m confused.

    Is dumping the debt ceiling the same as locking the barn door after the horses are out; or is it the exact opposite? Help!

  • kevin47

    “Aren’t we the only first-world country that has a debt ceiling?”

    Aren’t we one of the few first-world countries left with any hope of retaining that status?

    I’ll grant that the ceiling is symbolic, as is obvious from the fact that very few knew we even had one until about ten weeks ago. However, if it compels responsible political action, and forces our elected officials to have very real conversations – amongst themselves and with voters – about what is really necessary, then it is good to have it in place.

    • SFTor1

      Right—which assumes that members of Congress do not have a single calculator to share among them.

  • indy

    For any interested, here is a pretty good summary of the debt ceiling in historical context. It’s ridiculous political theater, of course, but it isn’t going away.

    http://www.ritholtz.com/blog/2011/05/debt-ceiling-limits-through-the-ages/

    • ottovbvs

      Right as usual Indy. The only question really is how far the Republicans want to push this. The pressure will keep getting ratcheted up over the next two and a half months, and we’ll see more ridiculous bloviating from right wing chatterers about how the US defaulting on its debt is no big deal, but it is of course. Obama is holding all the cards on this really.

  • nhthinker

    Talking grasshoppers. There is no limit to the raids on Ants stores of grain.
    Aesop must be rolling in his grave or maybe his cadaver is being eaten by laughing grasshoppers.

    • ottovbvs

      We know you live in a fairy tale world NHT.

      • nhthinker

        Instead of “save for a rainy day”, it’s run up the credit card on a sunny day and run it up faster on a rainy day- make it illegal to have credit limits.

        Liberals- humans with the philosophy of Grasshoppers.

        • Non-Contributor

          Comparing the US monetary system to a credit card shows a level a immaturity and stunning lack of knowledge that got the US into this mess.

          I agree a great article and the debt ceiling should be abolished. If politicians want to impact the current debt issue they need to focus on unemployment. Anything else is pure theater.

        • UncleLew

          Yeah, and conservatives believe on skipping out on the tab, hoping their big brother liberals will show up the next day and pay it.
          Did you really forget about two unfunded wars, unfunded Pharma giveaways and unfunded Medicare Part D?
          And the two wars were kept off the books.
          Sheesh.

        • nhthinker

          unclelew-
          You aren’t making any sense. The article is about abolishing the debt ceiling. Responsible economics would be requiring a balanced budget with the use of debt for emergencies: Such a plan IS consistent with having a debt ceiling.
          Care to try again?

    • Xclamation

      “Therefore I say unto you, Take no thought for your life, what ye shall eat, or what ye shall drink;
      nor yet for your body, what ye shall put on. Is not the life more than meat, and the body than raiment?” (Matthew 6:25)

      The Bible, squashing the indignANT (see what I did there?) for some 2000 years.

      • nhthinker

        Jesus was all for separation of Government and religion. “Render onto Cesear what is Cesear’s”
        Pay your taxes.
        But give your charity in the name of God, not your government.

        NHThinker: quashing the liberal misuse of the New Testament.

        Jesus was for free will. If you want to give thousands of dollars extra to help the Feds balance their budget instead of giving those dollars in the name of Jesus to an appropriate charity: go right ahead… but the New Testament is not instructing you to.
        Forcing the rich to feed the poor is not New Testament. Advising the rich to do it voluntarily is all that Jesus was willing to do.

        • Xclamation

          Forcing the rich to feed the poor is not New Testament

          I won’t quote it at length, but you might want to take a gander at the Book of Luke, chapter 16, passages 19 – 31.

  • armstp

    Aren’t we the only first world nation afraid to raise taxes even though we pay some of the lowest taxes among first world nations in order to balance the budget?

  • WillyP

    nice to see FF now employs cry baby writers.

  • forgetn

    Actually, it makes perfect sense for the GOP, that way members of congress can tell their district, that they never raised the ceiling… they just removed it!

  • Chris Balsz

    “Even if all bondholders are paid on time, the government’s cavalier attitude with respect to meeting other obligations may not escape the attention of the bond markets. If interest rates increase because of that not only will the cost of national debt servicing increase significantly, but the cost of debt for private entities (including consumers) will increase too.”

    How would the bondholders show that? By refusing to fully subscribe to a bond sale given the unattractively low rate of return? That’s already happened, and the Fed stepped in to save the Treasury from having to raise yields. And only the Fed can say if they’ll keep doing that. And they’re not promising anything.

    ” But even if the bond markets just shrug it all off (and that’s a very big “if”), government contractors and vendors will surely have to factor in the possibility of having to wait for months for their invoices to be paid. So everything will be more expensive for the government (including the already fast growing Medicare and Medicaid). ”

    Seems to me promising to borrow as much more as is needed to cover increased prices, forever, would have the same effect on bids.

    “Government employees (including the military) will have to factor in the possibility of abrupt layoffs or delayed paychecks, and so payroll costs will go up.”

    But employees can’t negotiate higher wages with their supervisors. Congress sets the pay grades. And in a time of 9% unemployment, how hard can it be to replace dissident walkouts?

    • Watusie

      “The full consequences of a default — or even the serious prospect of default — by the United States are impossible to predict and awesome to contemplate. Denigration of the full faith and credit of the United States would have substantial effects on the domestic financial markets and the value of the dollar in exchange markets. The Nation can ill afford to allow such a result. The risks, the costs, the disruptions, and the incalculable damage lead me to but one conclusion: the Senate must pass this legislation before the Congress adjourns.”
      -St. Ronald of Reagan, 1983

      “Congress consistently brings the government to the edge of default before facing its responsibility. This brinksmanship threatens the holders of government bonds and those who rely on Social Security and veterans benefits. Interest rates would skyrocket, instability would occur in financial markets, and the Federal deficit would soar.”
      -St. Ronald of Reagan, 1987

      • Otto

        It would be awesome if there were video clips of Pres. Regean making those statements. Then just run those clips as commercials stating how the Congressional (R)s are following the exact path Pres. Regean lobbied against all those years ago.

  • Frumplestiltskin

    good article by Andrew, no objections to what he says.
    nhthinker is always good for a laugh too. Hey nhthinker, need I remind you the last President to have a budget surplus was a Democrat? And Al Gore swore to put the surplus into a lock box for a rainy day but it was Bush who threw it all away giving Social Security surpluses to the wealthy because it was somehow their money. Such a bizarre fantasy world you live in.

  • Houndentenor

    Some of us are afraid that the ongoing deficit problem will never be in the news again if we don’t butt up against the debt ceiling every few years. We were serious about the deficit in the 90s. I hope we remember the deficit once we are out of the economic doldrums, but I’m not optimistic.

  • indy

    How would the bondholders show that? By refusing to fully subscribe to a bond sale given the unattractively low rate of return? That’s already happened, and the Fed stepped in to save the Treasury from having to raise yields.

    Can you offer any evidence of this conclusion? Where does the fed say they are purchasing bonds to ‘save the Treasury from raising yields’?

    • ottovbvs

      For Balzs empirical evidence is not required. Assertions are just fine. QE 2 to which I assume he refers is tapering down and will be definitely over in June. Accordingly if he is correct bond yields are going to jump substantially. And if they don’t? Never mind he’ll have some new cockamamie rationale.

      • indy

        QE2 happened well before the issue over the debt ceiling. Pavelyev’s claim is that default may cause a sharp rise in bond yields (and an increase in the cost of servicing federal debt). How does QE2 counter that claim? If anything, there will be an additive effect. Where is the logic to invoking QE2 as a counterclaim to Pavelyev’s assertion?

        • Chris Balsz

          Because the bond market does not dicker and haggle over the yields. Treasury publishes a yield, and if there aren’t sufficient sales, they offer a higher yield at the next auction.
          If the Federal Reserve purchases bonds, that undermines the ability of the “bond market” to “demand” higher yields.

        • indy

          Still don’t understand how your point relates to the quote you responded to in this article. How is QE2 (which I understand you personally don’t like) related to the article’s assertion that bond prices will likely go down if we default?

      • Chris Balsz

        For ottovbvs empirical evidence is not required. He presumes the Federal Reserve will not continue qualitative easing, ever. To dispute him you must built a time machine and return with a newspaper headline about QE3.

  • LFC

    our current president recently had to repudiate his own demagoguery from a few years ago when the previous administration was seeking to increase the debt ceiling.

    Uh, do understand that his “demagoguery” was in response to runaway Republican spending coupled with irresponsible tax cuts that manufactured a large annual deficit when there should have been little to none? And that the current situation is a bit different since the policies of those Republicans drove the nation’s economy into the dirt?

    There are times for deficit spending and times to bring things back into check. It was time to work on a better balance from the mid-late 1980s through the late 2000s. Clinton took care of business during that time, the other Presidents not so much. Obama was right in speaking out against Bush and the GOP’s irresponsibility because there was no econ0mic need for the deficits they ran.

    We are now in a time where deficit spending is warranted. If the economy turns around and strengthens then Obama will be on the hook to start putting the budget closer to balance.

  • valkayec

    I agree that the debt ceiling should be dumped. It was a couple of decades ago, but for some reason which I’ve not learned, debt ceiling legislation was returned. Bartlett has advocated for some time that the debt ceiling be eliminated and the whole budgeting process be redesigned. Some time ago, he wrote a wonderful editorial on the history of the budget process.

  • think4yourself

    While I often side with the Libs, I disagree on this one. I think the debt ceiling debate, while it is certainly open to political grandstanding is one of the few times that light is shown on how much we are overspending more than we take in. All too often politicians make quiet backroom deals that are in their own interests without having to look at the bigger picture. If there is no debt ceiling vote, then the massive, increasing debt gets quietly buried.

    While I’m open to a different budgetary process, that is a separate issue.

    Of course, my solution for the debt ceiling vote is different than most Conservatives. I’d end the Bush tax cuts and raise them all back to Clinton levels, and enact spending cuts. If we can get back to surpluses, then we don’t need a vote to raise the debt ceiling.

  • indy

    I’d end the Bush tax cuts and raise them all back to Clinton levels, and enact spending cuts.

    Personally, I think this is exactly what will eventually happen. It is the obvious solution.

    The future of health care costs is still the most dangerous long-term economic problem facing the country right now, not the deficit or the debt.

    • think4yourself

      You have faith that politicians will tell the American public what they need, not what they want to hear. I’m not so sure, because their base always punishes them. Tea Partiers are looking for someone to run against Eric Cantor for not being conservative enough.

      • pnumi2

        ^ + 1 think4

        None of this not so sure stuff. You can bet the farm.

        • LFC

          Indy, I’d love to see all of the Bush tax cuts expire. It doesn’t get the whole job done, but it would be a great start.

  • Otto

    Clinton levels hell… Let’s roll taxes for the top bracket back to Nixon levels.

  • indy

    You have faith that politicians will tell the American public what they need, not what they want to hear.

    Well, here is what Dick Durbin (who I generally think of as Obama’s mouthpiece) said Sunday:

    Democrats are prepared to talk about the future of major entitlement programs, reform that is not going to deny the basic protections, which we put in the programs, but acknowledges the fact that we have serious economic problems ahead of us if we don’t have some reform in both Medicare and Social Security

    So, as far as I can tell, the base is in total control of only one of the parties. Either that changes somehow, or the ship probably goes down.

  • It’s Time To Eliminate The “Debt Ceiling”

    [...] raising the national debt ceiling, perhaps its time that someone stated the obvious, which is that the very idea of a “debt ceiling” is fundamentally absurd: The federal debt ceiling is utterly redundant, since Congress already has the sole constitutional [...]

  • maxfieldj

    Brilliant! Thank you Mr. Pavelyev for a different perspective. You are so right. How can they pass a budget several weeks ago that they now refuse to pay for? It truly is asinine.