A friend of mine refers to Congress’s periodic debt crisis displays as “political Kabuki.” It is a pretty accurate metaphor.
The current timeline calculated by the Congressional Budget Office shows the U. S. Treasury running dry about mid-October. We don’t yet know what kind of theater it will produce. In addition to Kabuki, there is also comic opera, always a Congressional favorite, and if the media percussionists join in, a debt limit crisis can appear as a total eclipse of reality – with a soundtrack.
Of course, it is always possible that it could be a complete non-event. Congress could quietly vote to raise the debt limit and return to its legislative routine. (My friend has a description of its legislative routine, too, but that is another story.)
The debt ceiling itself is an interesting phenomenon. Its origins date back to 1917 when Liberty Bonds were needed to finance our participation in World War I. Stripped down to its essence, a legislated debt ceiling is Congress saying something like, “The Constitution gives us sole authority to authorize federal debt – but, of course, we can’t be trusted so we need to pass a law limiting ourselves by placing a ceiling on how much debt the Treasury can issue.”
New legislation now has to be reviewed by the CBO to examine it for its impact on the deficit and, of course, the debt ceiling. From an economic policy standpoint, however, this presents an accounting problem when a government investment is involved. The economic payback for such an investment often is a delayed reaction and will take place over a number of years. Present value calculations can be used to evaluate the investment but the debt ceiling doesn’t accept present value to balance its books.
Whenever we get close to the debt ceiling, Congress launches into a period of intense “horse trading” that is accompanied by a considerable amount of posturing for the news media and speechifying for the constituents. Each political party blames the other for the impending government shutdown and we all dance closer to the abyss.
Other than that kind of legislative activity, it is not clear that the debt ceiling is very effective. It has not changed the trajectory of our national debt, which has been growing at approximately the same rate since Ronald Reagan jump-started it to finance his plan to put an end to the Cold War. It now stands at $19.8 trillion and is not likely to shrink in the near future.
While no other country has a debt limit as such, it is not necessarily a bad idea. It does force us to confront the reality and the dimensions of our debt at least once in a while. And that is a good thing.
Maybe in one of those bursts of reality we will come to grips with how much entitlements have come to dominate our federal budget and mock our efforts at fiscal policy. Our punching through the debt ceiling has little to do with presidential budget decisions and a lot to do with federal payment obligations written into law. They’re called entitlements because federal law where they appear is divided into “Titles.” Social Security, for example, is under Title 42.
If Congressional inaction causes a debt crisis it will be a self-created one, somewhat divorced from reality. The debt ceiling was imposed by Congress to limit their own ability to operate the government on borrowed money. Ultimately, though, the decision of how much debt is too much will not be made by Congress but by the financial markets.
There are two fundamental characteristics about financial markets: they lack a sense of humor; and they don’t accept excuses. And, as one very successful funds trader likes to say, “There are no friends in the market.” If our federal government defaults on its debt and its payment obligations, it could, and probably would, precipitate a financial collapse orders of magnitude worse than the crash of 2008-2009. Our economy would very likely suffer a collapse that could take generations to recover from.
So, each time we dance with a self-imposed debt ceiling crisis, we are playing a high-stakes game that has no payoff for us if we win but an economic disaster if we lose. Where’s the percentage in that?
We can only hope that Congress addresses the matter when they come back in session and quickly raises the debt ceiling before we get any closer to the abyss. That done, however, they, should give serious consideration to eliminating the debt ceiling altogether. Whatever its original value was, in today’s world its risks are high, its costs are extensive, and its benefits seem minimal. It’s long past its sell-by date.
James McCusker is a Bothell economist, educator and consultant.