By David Wilcox / Bloomberg Opinion
Last week saw a rare triumph of substance over politics in Washington, D.C. In testimony before the House Financial Services Committee, Treasury Secretary Janet Yellen spoke in favor of abolishing the debt ceiling.
She’s right: The debt ceiling deserves to go. This strange quirk of U.S. budget process serves no purpose except, now and then, to let one party or the other seek political advantage by threatening to throw the financial system into chaos. There’s never a good time to flirt with a financial crisis, but with the recovery still far from complete, now is an especially bad one.
On Monday, President Biden argued that the Republicans should agree not to filibuster a bill to raise the ceiling, allowing Democrats to pass the measure on a simple majority. Republicans have said they will play no role in resolving the situation. Democrats don’t want to go it alone, arguing that the other party should accept its responsibility for obligations incurred earlier, and anyway there’s no time for Democrats to do what’s necessary without such cooperation.
If Republicans refuse to budge, Democrats will have to go ahead by themselves. Last week, the Senate parliamentarian confirmed that the ceiling could be raised using the so-called reconciliation process. Time is short, and if this is to work, the Democrats will need to move quickly. To be sure, going it alone will require that they pay a price; it may be, though, the lowest-cost way out of the squeeze they are in. To make the most of that outlay, they should abolish the ceiling rather than just resetting it at a level that will cause this nightmare to recur a couple years from now. If the arcane rules of the Senate or other considerations prevent them from abolishing it outright, they should raise it to a stratospheric height, taking it out of consideration for a long time to come.
The principled case for such a move is clear. Congress and the president set the spending and tax policies of the federal government. The Treasury doesn’t get to separately decide how much it’s going to borrow: That decision has already been made. Over the years, spending has almost always exceeded revenues, and to finance the resulting deficits, the Treasury has had to borrow. But periodically this process runs afoul of the statutory limit on the debt the Treasury can issue. Once the limit is reached, and the Treasury has exhausted various delaying maneuvers, the government will be forced to default.
The Treasury can borrow at the financial market’s most preferred rates because no one has ever seriously questioned its ability to meet its obligations in full and on time. Through wars, financial crises and pandemics, the Treasury has always been true to its word. If that were no longer so, investors would build a risk premium into Treasury borrowing rates. For decades to come, future taxpayers would pay for the mistakes of today.
Some argue that a “partial” default might not be so bad. Maybe Treasury could delay payments essential to the fight against covid-19, or benefits for food-stamp recipients, or salaries for air-traffic controllers, while prioritizing payments to bondholders, thereby safeguarding the Treasury’s position as a risk-free borrower. Sound like a political winner? I don’t think so either.
The best argument in defense of the debt ceiling is that it offers a periodic opportunity to exert fiscal discipline. As nonsensical as it might seem to tempt Congress to renege on commitments, including ones of long standing, maybe the debt ceiling interrupts the nation’s progress toward fiscal irresponsibility. Yet the record of persistently rising debt hardly supports the theory. The right time to impose fiscal discipline is when the country makes its choices on taxes and spending.
Finally, you might think periodic debt-ceiling crises are mere theater that nobody need take seriously. Trouble is, the threat to let the government default would exert no force in political fights unless it had at least a shred of plausibility. Granted, the worst outcome might be unlikely, but it’s unacceptable that such a thing is even possible.
Moderate senators might be uncomfortable voting to either abolish the ceiling or render it irrelevant by raising it to some outlandish number. But if they have the courage to do so, they will have one great talking point: Thanks to their efforts, the nation’s financial future will be more secure. That should count for something. Regardless of whether they’re conservatives, liberals, or somewhere in between, voters should be pleased that Congress finally acted to stop the insanity.
David Wilcox is director of U.S. economic research. From 2011 to 2018, he was director of the Federal Reserve Board’s Division of Research and Statistics, and served as a senior adviser to three Fed chairs. In the late 1990s, he served as Treasury assistant secretary for economic policy.
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