In the Nation's Interest
If Not A Debt Limit, What?
By Joseph Minarik
This week, in a largely party line vote with the minority party dominating the winning side, the House voted to suspend (again) the debt limit until March of next year (and the Senate concurred). The dominant interpretation, following from the reported words of Speaker John Boehner (R-OH) in a caucus meeting, is that Republicans wanted to get the issue out of the way so that implementation of the Affordable Care Act (ACA, or “Obamacare”) could be the focus of public attention. Speaker Boehner struggled to find an alternative formulation that would pair the debt limit with some other issue – military pensions, triggered Medicare reimbursement cuts, provisions of the ACA and the Keystone-XL pipeline were mentioned – on which his party could demand concessions from the Administration. However, none of the alternatives that the Speaker – or anyone else – raised met with approval within his own caucus.
“Suspending” rather than increasing the debt limit, in case you have just tuned in, is a relatively recent policy innovation, attributed to Senate Minority Leader Mitch McConnell (R-KY). The Congress used to choose the date when it wanted the debt limit again to become an issue, translate budget projections into an estimate of the debt subject to limit as of that date, and then raise the limit to equal that estimate. However, forecasting is always difficult, especially when it is about the future (that one comes up all the time in my business), and so such exercises have proved subject to considerable error. Therefore, the innovation of “suspending” the limit until a date certain, and then having the limit snap to precisely the debt as of that date, has become highly attractive to our legislators – because it times the next “crisis” to the exact desired moment.
In theory, there is a potential risk to such a suspension, which is that the Treasury could borrow a pile of cash just before the suspension expired and thereby extend the time when the Secretary would run out of both tricks and money until well beyond what the Congress intended. Well, the legislators thought of that, and added legal language that restricts borrowing to activities authorized by the Congress – for which pumping up the Treasury’s cash balance doesn’t qualify.
So when the suspension ends, the Treasury will have its normal cash on hand, but the debt limit will snap to precisely the amount of the debt at that moment. Thus, the Treasury’s resources at that time will equal the sum of its cash on hand, its tax revenues, and its “extraordinary measures,” while its obligations accrue per normal. Once the latter exhausts the former, the Treasury falls behind on its bills. And importantly, both tax revenues and new obligations are highly unpredictable on a day-to-day basis, and Treasury’s minute-to-minute cash management capability is nil – meaning that once the suspension ends, the chance that the Treasury could have an “oops” moment and kite a few checks is non-trivial.
So it is great that we have avoided the risk that we could have a debt crisis in March of 2014. But what should we think and do before we have a debt crisis in March of 2015?
I have profound respect for those who are concerned about the nation’s finances, and believe that we need the current statutory debt limit because it is the only tool that we have to force us to face up to our obvious recent fiscal irresponsibility. But with all respect, that argument carries the same ultimate weight as would that of a local police department saying that its nuclear weapon is the only tool it has to deal with domestic disputes. The tool is not effective because the consequences of its use would be totally unthinkable. We need a better tool.
Certainly, the basic problem with our debt limit is that the consequences of violating it would be catastrophic, which renders it ineffective and dangerous as a bargaining tool – per the metaphor above. But a second problem is its inherent moral hazard. It gives legislators (and the executive) a tempting opportunity to play both sides of the street, to have their cake and eat it, too. Members of Congress can vote for ingratiating tax cuts and spending increases to pander to their constituents – and then can play the fiscally responsible guardians of the public finances by refusing to honor the debt that their own pandering created. One could argue that the unsustainable accumulation of the public debt has been just cycle upon cycle of such irresponsibility.
Just to make this process clear, imagine that all of the holders of valid claims against the Treasury lined up outside the building. Then send the Congress home – no new spending, no tax cuts. The line outside the Treasury would keep on getting longer – based only on votes that the Congress took long ago. The debt limit is about past commitments of the Congress, not future ones. Refusing to raise the debt limit is refusing to make good on those past commitments. It would not by itself in any way slow the accrual of new commitments. Only changes in the underlying spending and taxing legislation – not the debt limit – would do that. So refusing to increase the debt limit is refusing to recognize reality and to honor your own commitments – not changing policy.
Some scholars of the political process would say that we need somehow to put the approval of the spending that creates the debt, and the approval of the debt itself, together. Legislators should not have the chance to play both sides of the street – to vote for the spending or the tax cuts, and against the debt thus created. How could we change the debt limit in that direction?
One way would be to make an increase in the debt limit a consequence of the enactment of the budget resolution, which can permit spending and tax cuts. Not only would that at least create an obligation to think about the debt while approving the debt-enabling policies, but also would provide an incentive to pass a budget plan.
A second way would be to make a debt-limit increase a part of each individual spending or tax-cut bill. That would make clearer – though it should be clear enough already – that enacting spending or cutting taxes by the very fact creates debt.
Exponents of the “only tool we have” school of thought would insist, at a minimum, that either of these alternatives make the increase in the debt limit explicit and prominent. But they might still express dissatisfaction that these approaches would not force a moment of reckoning when the limit is approached. But again, that “action-forcing event” is not a credible threat, because its consequences would be totally unthinkable.
And truth be told, neither of these alternatives would avoid all debt-limit crises. The debt can leap above projections whenever the economy underperforms the forecast. Such episodes inevitably will happen from time to time. And beyond that, recall that our debt subject to limit includes the balances in the federal government’s trust funds. Even in the best of times – witness the period of public debt retirements in the late 1990s – the debt subject to limit still can rise. So another sensible change to the debt limit would be to denominate it in terms of debt held by the public, not the debt as now defined by the statutory limit.
All fine and sensible. But the bottom line is that our legislators should do their jobs from day to day, not only when confronted by a financial cataclysm. If the Congress would fix our budget problem and then keep to the straight and narrow, we definitively would not need – and arguably should not have – a statutory debt limit.