Economists tend to either dislike or loath Donald Trump’s policies. But a couple of years ago, the president had an idea that would have improved his standing with technocrats: He said he wanted to erase the debt ceiling, the limit on the amount the Treasury is legally allowed to borrow to fund the government even if the U.S. has expenses that exceed it.
With the way Congress spends money, it’s a number that has to be constantly raised by bipartisan agreement — which has turned it into a vehicle for political hostage-taking as each party tries to use it to force its fiscal agenda on the other side while the Damocles Sword of an impending U.S. default, should the limit not be raised, acts as palpitation-inducing pressure.
The inane policy fails miserably at its stated aim, exacerbates political polarization and threatens economic chaos on a semi-regular basis.
In short, it’s just about the most fiscally imprudent way for a government to sort out its budget priorities, which is why it’s unheard of outside of the United States. The inane policy fails miserably at its stated aim, exacerbates political polarization and threatens economic chaos on a semi-regular basis. The statutory debt limit should be repealed and replaced with a bipartisan commitment to reduce the deficit so the debt actually stops growing.
But that’s hard. Trump’s interest in the debt limit has proved fleeting as he has sunk deeper into the swamp he said he would drain. Another budget agreement is imminent in Washington as members of Congress rush to make a deal before they go on recess at the end of the week. Yet the current drama is unfolding without even a hint of trying to do away with the debt limit, an anachronistic policy that does little more than satisfy a hyper-partisan political system’s need to draw blood.
If the current arrangement Treasury Secretary Steven Mnuchin and House Speaker Nancy Pelosi have hammered out goes through as expected — with the debt limit suspended for two years, until after the next presidential election — it will be just one more of the 80-odd times the Congress and the president have reset the ceiling since the early 1960s.
U.S. politicians have sought to curb debt since the American Revolution, and the debt limit has existed in its current form since the 1930s. The idea is to provide fiscal stability by making excessive borrowing illegal. However, it is difficult to put legal constraints on the men and women who write the laws. Congress approves spending programs and tax cuts with little regard to the debt ceiling; when the limit is reached, they create a new one.
Much as Benjamin Franklin tried to make thrift a defining American characteristic, there is no political consensus around the need for serious fiscal constraint. While the fear of fiscal excess imposed by an ever-looming debt limit might be intended to cause budget-trimming, in Washington, debt has instead become a weapon to use against your political opponents.
The debt ceiling first took on its modern — and more potent — political force during the tenure of Ronald Reagan in the 1980s, according to George Hall of Brandeis University and Thomas Sargent of New York University. The disciples of Reaganonomics reckoned they could coerce future Democratic opponents into accepting smaller government by running up the debt to its statutory limit, forcing Congress to cut spending.
But the Reaganites might have misjudged the extent to which Democratic lawmakers could be cowed. To be sure, Bill Clinton was intimidated by the size of the federal government’s debt, and perhaps also the willingness of Republican Speaker Newt Gingrich to shut down the government and threaten default over the debt ceiling, to the extent that he did eventually cooperate on spending cuts.
But the economic consensus of the Clinton years didn’t hold, and the debt limit offered no constraint on the willingness of both parties to spend in excess of revenue. Even when fiscal hawk Paul Ryan was House budget committee chairman in 2013, he talked about extracting concessions from Democrats by taking advantage of the fact that the debt ceiling would soon be reached. “We’re going to decide what it is we can accomplish out of this debt limit fight,” he said.
And it was the 2017 tax law Ryan ushered through as House speaker, in cooperation with Trump, that has contributed considerably to the current spending spiral. Most mainstream economists would have liked the corporate tax cuts, but the GOP cared little about making sure there would be enough revenue to keep the deficit from growing. And sure enough, the Treasury is collecting less money than forecast. Trump says his tax cuts are responsible for stronger economic growth and a booming stock market, but they also reinflated the budget deficit to $1 trillion, a level last seen in the aftermath of the Great Recession.
The financial dysfunction isn’t just limited to some flexible accounting. Playing politics with the debt ceiling means there’s the potential for a catastrophic mistake.
In theory, this massive budget gap should have meant the government had to stop borrowing in March because of the debt ceiling, which in turn would have forced the U.S. to default on its debt payments given the price tag of its appropriations. At a minimum that would have violated the Constitution. The sight of the world’s biggest economy missing a debt payment probably would have also resulted in at least a minor financial crisis, given how edgy investors are these days.
None of that has happened — yet — because the Treasury has a few accounting maneuvers that allows it to delay the reckoning, such as dipping into various retirement funds. Mnuchin said a couple of weeks ago that his department’s tricks were proving to be less effective than anticipated, and that the U.S. would default as early as September unless the debt ceiling were raised.
Sadly, the financial dysfunction isn’t just limited to some flexible accounting. Playing politics with the debt ceiling means there’s the potential for a catastrophic mistake. The U.S. is the world’s most important economy, home to the planet’s dominant central bank and issuer of the globe’s de facto unit of exchange. The sight of that country missing a debt payment would most likely send financial markets into a tailspin, since Treasury bonds are the benchmark against which tens of trillions of dollars worth of financial assets are set.
Even without such miscalculation, there’s evidence that decades of debt-limit drama has already raised U.S. borrowing costs because lenders have come to see Washington as a greater credit risk. In 2011, debt-rating agency Standard & Poors decided the U.S. no longer deserved the firm’s highest credit score, mostly because of the federal government’s refusal to free the Treasury’s borrowing authority from political gamesmanship.
The Government Accountability Office said in 2012 that the delays in raising the debt ceiling in 2011 cost the government $1.3 billion in higher interest payments that year. And because some investors have long memories, it’s likely the U.S. is being cost billions more.
No other country runs its finances this way. More than 90 nations have laws that require them to limit deficits, debt, or both, according to the International Monetary Fund. Many of these restraints demand that governments balance their books, or at least keep deficits relatively small. Some apply a version of the debt limit, but their controls tend to be much more flexible so an economic crisis isn’t triggered the moment the limit is breached.
Denmark is the only other rich country that sets a nominal ceiling. However, the Danes leave themselves with lots of headroom in order to avoid the constant threat of chaos; the one time Denmark raised its debt ceiling, in 2010 after the fiscal crisis, its politicians doubled the amount.
If the debt ceiling were lifted, there’d be less brinkmanship and more opportunity for conversation about fiscal policy rather than confrontation.
Indeed, if political leaders want to prioritize fiscal responsibility, they shouldn’t need a legal mechanism to do so; they should simply act accordingly. In Canada, the net federal debt as a percentage of GDP is around 31 percent today, compared with about 67 percent two decades ago. The shift in circumstances was the result of politics; Canada has no debt limit, only broad support for fiscal constraint that extends across the political spectrum.
There are some in Washington who want to end the budget drama, but not many. A bill in the Senate would get rid of the borrowing limit, but it has only six sponsors, all of them from the Demcocratic Party. That’s unfortunate. If the debt ceiling were lifted, there’d be less brinkmanship and more opportunity for conversation about fiscal policy rather than confrontation.
Maybe that’s why Trump — the driving force behind trade wars, a more antagonistic approach to Iran and political chants such as “Send her back!” — decided to keep it.