Fiscal Hawks Need to Fight for the Debt Ceiling
It is a constitutional tool to save America from itself
Whenever the establishment left and right agrees on something, expect a big assault on our democracy. That is the case with the emerging consensus that the debt ceiling should be dumped—for two years at least—in any deal that replaces House Speaker John Boehner's ill-fated Plan B so that spending hawks can't later hold the economy hostage to extract cuts. But there are few external market checks on America's profligacy. Without strong internal political checks, it might well spend itself into oblivion.
America's total $16 trillion accumulated debt represents 100 percent of the GDP. Add in its $85-plus trillion in unfunded pension and health care liabilities and the debt shoots up to 550 percent—only marginally better than France. Every man, woman and child in America is currently on the hook for $190,000.
But the Obama administration obviously doesn't give a hoot. Otherwise, its plan to avert the fiscal cliff would have included serious spending cuts and entitlement reform, not primarily a scheme to raise taxes on households making over $250,000 which would at best raise about $40 billion per year—around what Washington borrows every week.
As if that were not outrageous enough, the administration also demanded in its fiscal cliff package that Congress forever forfeit its constitutionally given debt authority. (This authority was already considerably weakened during World War I. At that time, Congress gave up its authority to approve debt issuance for specific projects. It started pre-approving instead a lump sum loan amount so that the president could raise money quickly to fund the war effort.) House Speaker John Boehner (appropriately) laughed at Obama's suggestion at first. However, later he whispered in the president's ear that he would be willing to lift the ceiling, which will expire in February, for a year if he went along with his Plan B. But with the collapse of that plan, it is likely that Obama will try and write in a two-year extension in whatever deal he works out with Congress now—and take away the only tool that Republicans have to enforce any spending discipline.
And in this he might get the help not just of liberals—but smart-set conservatives too.
Liberals have been railing against the ceiling ever since fiscal hawks used it to create a spending showdown last year. They argue that separating the budgeting and the borrowing functions of Congress means that Congress can authorize spending but then refuse to sanction the means to pay for it. "The idea that the Congress gets to vote twice on whether to pay for [expenditures] it has appropriated is crazy," insists Bill Clinton. Liberals want America to follow other developed countries where legislators are required to approve new borrowing as part of the budgetary process.
What they ignore is that many of these countries have hard limits on debt issuance as part of the budgetary process—kind of like a Balanced Budget Amendment, which liberals resolutely oppose. For example, Germany has a constitutional amendment that requires that structural deficits not exceed 0.35 percent of GDP.
What's more, that's effectively how things worked in America until Democrats decided three years ago that passing budgets was a dispensable nicety and started authorizing spending through ad hoc resolutions. This meant they did not need to negotiate or set spending priorities to get a majority buy-in, a process that made raising the borrowing limit a fait accompli. But eliminating the ceiling in the absence of budgets is tantamount to giving Democrats a blank check and then gagging opponents from raising questions.
But liberals aren't the only ones questioning the debt ceiling. Writing for the American, a magazine of the conservative American Enterprise Institute, Steve Conover notes that the possibility of America defaulting undermines investor confidence in America's sovereign debt instruments, something that could raise borrowing costs and hurt growth.
That strains credulity.
For starters, not raising the borrowing limit doesn't mean default. America's annual debt service costs are only about 10 percent of federal revenues, which means that the country can easily pay investors, meet its obligations to its retirees (for now) and still have money left. It would certainly mean cutting spending somewhere, but that's a prospect to be cheered, not lamented.
Furthermore, America has experienced an epic financial meltdown, sluggish growth and is up to its eyeballs in debt and credit markets are still offering it loans at effectively zero percent interest rates. It makes no sense that a little budget fight to put America on sounder fiscal footing would cause them to significantly jack up these rates.
But one reason credit markets have ignored America's spending addiction is that, with Europe on the verge of meltdown, they have nowhere else to go. More importantly, the dollar's status as a reserve currency makes it much easier for America to issue debt without fearing commensurate interest hikes. In other words, America's superpower status has created an incentive for fiscal irresponsibility.
Even if a debt-ceiling showdown causes some rate hikes, catastrophe wouldn't follow. The resulting budgetary strain might well prod legislators to deal with the deficit now—forestalling a far uglier reckoning down the road.
Great powers fall not due to external threats but their own avarice. The existence of the debt ceiling suggests that America is aware of this. Republicans should yield as little as possible on this crucial tool. Cavalierly bargaining it away will be a terrible sign.
A version of this column originally appeared in the Washington Examiner
