Yet again, economic storm clouds are forming over Washington. Unless Congress acts, and soon, the United States could face "a worse financial economic crisis than anything we saw in 2008,"warns Austan Goolsbee, chairman of the president's Council of Economic Advisers (and former Slate contributor). Treasury Secretary Timothy Geithner sent a stern letter to Congress: Inaction would cause "catastrophic damage to the economy, potentially much more harmful than the effects of the financial crisis of 2008 and 2009."
Geithner and Goolsbee aren't worried about the United States' ability to pay its debts so much as its willingness to do so. Indeed, they're having nightmares not about the debt, but about the debt ceiling—a relic of an earlier budget era and a redundant mechanism for managing the nation's finances. Which raises the question: Why does the United States even have a debt ceiling in the first place?
All wonks agree: The debt ceiling is not, strictly speaking, a necessary budget tool. By itself, it does nothing to keep the country from running into the red. It works like this: Congress controls the annual surplus or deficit by determining the country's levels of taxation and spending. (The government cannot predict receipts and outlays down to the dollar, but it's pretty good at keeping the ledger accurate.) Annual deficits contribute to the overall national debt, which the Treasury Department finances by issuing bonds. The ceiling acts as a check on that overall debt: When Treasury needs to issue debt above the ceiling, Congress raises the ceiling.
Normally, that is a perfunctory act—but every once and a while, a few members of Congress— or even a whole party—object. But first: What would happen if Congress failed to up the ceiling? Goolsbee and Geithner have it right: It would be a catastrophe. The Treasury would no longer be able to issue new bonds, meaning that the United States would eventually start failing to pay its bills (like Social Security payments) and to service its outstanding debt (paying bondholders interest). The world bond market would likely panic, raising borrowing costs for all individuals and businesses. Moreover, the United States' borrowing costs would never fall as low again—investors would never fully trust the United States to pay back what it promises.
The specter of permanently raising the United States' borrowing costs, causing a worldwide bond panic and perhaps precipitating a global recession is usually enough to prevent politicians from monkeying around with the debt ceiling. But that does not stop them from using it to posture about fiscal responsibility.
"The fact that we are here today to debate raising America's debt limit is a sign of leadership failure," a little-known Democratic senator from Illinois said on the Senate floor in 2006, for instance. "Leadership means that 'the buck stops here.' Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership."
Today, the United States has $13.95 trillion in outstanding debt, with a ceiling of $14.29 trillion. The country will probably hit the ceiling in March or April. It is not feasible, let alone desirable, for Congress to slash spending or raise taxes quickly enough to stay under it. (Indeed, Congress just passed a bill massively increasing the deficit.) So Congress needs to raise the debt limit—soon. But some Republicans, led by Sen. Jim DeMint, are threatening to vote against raising the ceiling. And some worry that they aren't just posturing.
So how did we end up with this system anyway? According to a thorough report from the Congressional Research Service, Congress used to authorize each and every one of the Treasury's debt sales. Then, in 1917, to ease financing for the United States' entry into World War I, it set an overall limit—the debt ceiling—and let Treasury issue as many Liberty Bonds as it needed to within that limit.
Now, budget wonks argue, the ceiling is no longer really necessary, given Congress' budgetary power and process—as well as the realities of the budget itself. "It used to help control the amount you could appropriate," explains Stan Collender, a partner at Qorvis and longtime budget watcher and expert. "But so much of the debt is mandatory now." He continues: "The truth is: You shouldn't have to raise the debt ceiling separately. The debt ceiling should be raised automatically when Congress agrees to a conference report on a budget resolution. That's how it's supposed to work. It is an anachronism."
And a number of wonks agree with him. Former Reagan domestic policy adviser Bruce Bartlett, for instance, has railed against it—in particular, its use as a political football. "As far as I am aware, no other country on Earth has the idiotic policy that the United States has of having a legal limit on the amount of bonds the central government can issue," he writes. "They correctly recognize that the deficit and the debt are simply residuals resulting from the government's tax and spending policies. It makes no sense to treat the debt as if it is an independent variable." (Actually, some other countries do have debt ceilings—Denmark, for instance. But they also tend to have parliamentary political systems, with which it's easy for the party in power to raise the ceiling.)
But some say we should keep it. In an influential article, for instance, law professor Anita Krishnakumar of St. John's University argues that there are two reasons to keep it, even if it is an anachronism. "First, the statute is the last remnant of congressional control or accountability over the national debt," rather than just annual deficits. "Second, the debt limit statute encourages legislators to consider the interest of the general public and future generations, rather than those of special interests, and thus acts as an important institutional check on party and interest group politics."
Of course, one could easily make the opposite argument: By causing the country to default on its debt, or even spooking bond markets with the possibility, Congress would create economic havoc and increase the costs of borrowing for future generations. Only one thing is certain: Whatever happens in March, future generations will pay for it.
Bloggingheads Video: Daniel Drezner and Adam Serwer Discuss the Debt Ceiling