$19 Trillion and Counting: The Dangers of Unlimited Debt
"If you find yourself in a hole, stop digging."
The statutory limit on how much debt the federal government can accumulate is back in the news, but this time it's not because Washington is close to breaching it. That's not a present concern thanks to the year-end bipartisan spending spree that included a suspension of the debt limit until March 2017. The news is that a report from the House Financial Services Committee found that the Obama administration's Treasury Department has been repeatedly misleading the American public on the matter.
Treasury has routinely rejected the idea that once the government reaches the debt limit, federal spending could be prioritized to avoid a default. During a previous debate over the debt limit in 2011, my colleague Jason Fichtner and I wrote a paper explaining that even if Treasury is unable to issue more debt, it can still avoid a default and thus give policymakers more time to implement reforms that would put the government on a more sustainable fiscal path.
Contrary to Treasury's claims, we argued that it has several financial management options to continue paying the government's primary obligations. Specifically, Treasury could use incoming tax receipts to cover high priority claims including the interest on existing debt, the principal on that debt, Social Security benefits, and more. Government assets could also be liquidated to pay bills.
Treasury claimed that such options were neither acceptable nor feasible, and thus the only choice was for Congress to promptly agree to increase the debt limit. Then-Treasury Secretary Timothy Geithner claimed that prioritizing was out of the question and that failing to pay any of the government's bills would be the equivalent of defaulting on the debt. The same thing happened again during the administration's 2013 showdown with Congress over lifting the debt limit. This time it was Geithner's replacement, Jacob Lew, claiming that prioritization was not an option.
We now know that the administration's claims were untrue. As it turns out, documents subpoenaed by the House Financial Services Committee reveal that during the 2013 debt ceiling debate the Obama administration knew it was actually capable of prioritizing payments. Indeed, the Federal Reserve Bank of New York was conducting "tabletop exercises" in preparation for what the administration was publicly stating couldn't be done. The documents show that while Treasury was helping the administration scare the public, its behind-the-scenes actions proved otherwise.
While Treasury and the administration's deceptive behavior is disturbing, it's good news for the next battle over lifting the debt limit early next year. I have repeatedly made it clear in the past that I believe defaulting on the debt is not an acceptable option. However, continuing to raise the debt limit without making any substantive changes to the unsustainable financial path we are on is just as irresponsible. Under the watch of both Republicans and Democrats, the debt limit has been raised 20 times since 1993. The result is that the federal debt has ballooned from less than $5 trillion in 1993 to $19 trillion and counting today.
Deficits are also going back up thanks to a bipartisan inability to get spending under control. According to the Congressional Budget Office's latest projections, cumulative annual budget deficits will add another $9.4 trillion in debt to the federal government's mountain of red ink. That figure is $1.5 trillion higher than the CBO projected less than six months ago.
Will Rogers once said, "If you find yourself in a hole, stop digging." Policymakers need to stop digging and instead implement institutional reforms that constrain government spending, which is the underlying cause of the mounting debt. Indeed, that should be a precondition to raising the debt limit next year. And this time we will know that Treasury has the means to give Congress the time to finally get it done.
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