• Abiye Alamina

The Debt Ceiling: A Symbolic Absurdity

With the prospect of soon running out of money for spending given the legal borrowing limit set by the Debt Ceiling, a budget deal was just struck between the President and lawmakers in both the House and Senate to raise the ceiling and increase discretionary spending to $1.37 in fiscal year 2020 from its current fiscal year level of $1.32 trillion.



Now forgive me for the scathing headline but, if US political history with regards to our federal debt is familiar, you will be hard pressed not to agree with me. It is that time of year again where our borrowing appetites must be satisfied and as running budget deficits is our norm we have to contend with this speed bump. It is nothing more than a speed bump, which for most drivers is an annoyance, but for those for whom the speed bump has been put in place, it is necessary as it helps to save lives.



The Spending Speed Bump


At the federal level, the US government does not face a balanced budget requirement and this allows the government the flexibility to borrow against its current and future growth potential and spend above its current tax receipts. This has resulted in budget deficits - which are yearly shortfalls in revenues against spending - in virtually all but a few years since the declaration of independence in 1776. The accumulation of which is now over $22 trillion in outstanding federal government debt.


The practical purpose of the Debt Ceiling is to have Congress look closely at tax and spending policies and to assess the justification of current budget proposals, in effect forcing us to stop and evaluate implications and strategies for slowing the growth of this debt with the ultimate goal of reducing it over time. Hence it exists as some flexible ceiling on borrowing such that government cannot borrow once that ceiling is reached unless Congress raises it to a new higher level.


Of course, it has always been raised, though some of the time amidst much political kerfuffle, as it presents political opportunities for some members of Congress to push for some compromise on their pet projects by threatening to withhold their vote in favor of or against raising the ceiling, depending on what side it is advantageous for them to be. The issue though is that it serves no real practical purpose, at least from a historical perspective.


Why?


Everyone in Congress is aware of the federal debt and how it is increasing over time. Each year appropriations committees in both the House and Senate either reach compromises on spending along with the President's budget proposal or they pass continuing resolutions that allow the government to remain funded. Their deliberations include implications for deficits and the resulting federal debt, so the issue of why we must have a debt ceiling is actually moot.


Apparently it seems to suggest that Congress after having passed bills or resolutions that directly impact the federal debt come around within a few months and ask whether or not they should prevent the government from carrying out what they had previously approved.



Real World Speed Bumps


If the Debt Ceiling does act like a speed bump can it not be argued that it is important for the health of the economy? The answer is no. Real world speed bumps serve to enforce an existing speed limit or to impose one where no explicit limit has been stated. In this case, there is no balance budget requirement. There is nothing other than ideological disposition that guides the government on the issue of borrowing. This is why we can pass huge tax cuts, which bluntly mean greatly reduced government revenues, and then pass huge spending increases, both of which serve to score political reelection points among a typically short sighted electorate but cause the deficit to sky rocket and put a fiscal drag on the long term health of the economy.


The Debt Ceiling serves no constraint whatsoever and because it has no benefit is more of a nuisance as it creates room instead for political maneuvering such as threatening a government shutdown over petty partisan projects which should normally be resolved without adding more costs to the operation of a government already saddled with debt.


The Debt Ceiling is a symbolic absurdity and should be scrapped in favor of some real balanced budget constraint met over a flexible period of years with punitive measures in place for elected officials who, through measurable actions, prevent the meeting of this constraint over the expected budget cycle.



Elected to do the Hard work


It is easy to make recommendations like I have done, that we have a balanced budget constraint met over a flexible period of years. In practice there are realities that make achieving this difficult. More than two-thirds of government spending is mandatory spending, and a huge chunk of discretionary spending is on defense. However, we can identify important areas that have to be looked into and addressed.


First, if taxes are not going to go up in order to generate more revenues because they are politically suicidal for elected officials, then tax cuts should not be the way to go if we are not in a recession. With the reality that politicians may lack the political will to have taxes return back to prior levels, this was just an unnecessary political maneuver.


Second, spending growth has to be curtailed. As much as it is tempting to want to spend on projects that signal to constituents some effectiveness in office - the so called pork barrel spending - if it is not directly linked to raising the future growth potential of the economy, it should not be carried out.


Third, key aspects of mandatory spending need to be revisited through reform: social security benefits, age of retirement, Medicaid and Medicare spending, and any cost generating aspects of the Affordable Healthcare Act, all need to be brought to the table and assessed to ultimately reduce significantly the spending on these taken together. Again, equally politically unattractive, but these are where the unavoidable hard work has to be done instead of the symbolism of having to vote on raising the Debt Ceiling, which, for all practical intents and purposes, is meaningless.



(567) 318-4477

©2017 BY SOUND ECONOMIC AND PUBLIC POLICY CONSULTING.