The federal debt limit does not affect the state of New Jersey, per se. But the frequent brinkmanship over it in Washington could eventually lead to loss of federal dollars to our budget if an extension of the debt limit is not approved. If the federal policymakers do one constructive thing this year, eliminating altogether the debt limit — and the requirement that it periodically be adjusted by Congress — would be a good start.
The U.S. treasury technically hit the statutory debt limit of $22 trillion in March of this year, but took the usual “extraordinary actions,” such as deferring payments into Civil Service and Postal Retirement Funds, in order to provide the necessary cash to make budgetary expenditures.
Currently, the debate over the debt-ceiling extension is being combined with political maneuvering related to spending caps, lagging tax revenues, long-term deficit projections and the related impact on the U.S. and global bond markets. Best guess is that, unless Congress votes to raise the ceiling, a default could occur in September, 2019. This political wrangling benefits no one and a failure to meet debt requirements is even worse than closing down the government again — the most recent test of chicken played by both parties.
Debt-ceiling politics is simply gamesmanship; encourages needless brinkmanship and it endangers the creditworthiness of the U.S. government. To paraphrase former Federal Reserve Chairman Bernanke — refusing to raise the debt limit is unacceptable no matter what the reason.
I propose we eliminate it altogether. Here’s how with some background:
What is the debt ceiling? Raising the debt-ceiling is not about spending more money. It is about paying for what already has been approved and spent. Furthermore, the rational and apolitical way to address permanently this issue is simply to eliminate the current debt-limit process. Sounds scandalous? Not really.
Each year the president proposes a budget — actual spending is approved later only when Congress passes a series of appropriation bills with the president’s signature. If all goes well, spending commences on Oct. 1. (Nothing ever goes well; but that is another story.)
The federal government has had budget deficits in 44 of the last 48 years — where expenditures exceed revenues.
How do we pay our bills when revenue is not sufficient? We borrow. The cumulative total of all previous annual deficits has aggregated to over $22 trillion of debt. In some years the deficit has been as large as $1.4 trillion (FY 2009 fiscal crisis). The last budget under President Obama had a $550 billion deficit. The gap between receipts and expenditures is projected to reach the $1 trillion level again before the end of this fiscal year.
What happens if the debt ceiling is not raised? While it’s possible, the government will not likely default on its debt payments. That action would be unprecedented and would severely damage the long-term credit-rating of the government. Most likely other bills would not be paid — maybe Social Security checks, maybe Medicare payments, maybe salaries. Somebody would need to prioritize bill paying so that debt payments on bonds could be made.
What’s the problem with prioritizing bills? Can you imagine the politics around that issue? Furthermore, prioritization of bill paying is really default by another name as the government is choosing not to pay its IOUs. All claims are backed by the credit of the government. Can you imagine the claims against the government? More important, the once-golden credit of the U.S. government would be compromised, resulting in higher interest rates and more politics.
How often has the debt ceiling been raised? The debt ceiling has been increased 87 times since 1959 as ultimately Congress and the president reach an agreement. And, always, the delay is strictly political. The rhetoric is always the irresponsibleness of the guy in the White House or the other political party. During Obama‘s tenure, the Republicans withheld raising the debt ceiling unless he eliminated the Affordable Care Act (ACA). Eventually wiser heads prevailed as the president would not budge on the ACA. Curiously, when President Obama was Sen. Obama he threatened not to raise the debt ceiling when George Bush was president!
Doesn’t the debt ceiling solve the problem of runaway deficits? An argument that is usually made is that our debt is now almost 100 percent of gross domestic product and is projected by the Congressional Budget Office to increase to 185 percent of the nation’s total output by 2040 and therefore adherence to the debt limit would solve the problem.
It does not. The solution to debt is to limit spending — or to raise taxes. Each year Congress and the president approve spending and revenue and those decisions determine the debt that must be issued. If budgets were lower or taxes higher, debt would decrease.
We could certainly have a discussion about what is driving spending (mostly Social Security, Medicare/Medicaid and defense) and how reducing these costs would lower the amount of debt. But that is another discussion.
Why we should eliminate the debt ceiling: I argue the debt-ceiling debate is counterproductive. It’s politically driven. It has no rational reason for existing. And it plays no constructive role in budget policy. Think of it this way — if Congress and the president approve spending bills that result in a deficit, they have explicitly agreed that more debt is needed to pay bills.
What needs to happen? When appropriation bills are enacted the statutory debt ceiling should automatically increase to pay for bills that are consistent with the assumptions in the spending bills. That’s not difficult logic but it’s ignored for political reasons.
This change will stop the needless and unproductive rain dance that happens periodically.
And, we need to address rationally and realistically the long-range fiscal problems facing the country. Thoughtful practitioners, academics and politicians have produced reams of reports to deal with the issue, but the approaches — tax increases and significant program changes — always stops the process from moving forward.