After our most recent adventure with the debt ceiling, the peculiar American budgeting institution’s reputation may be at an all-time low. But many fiscal conservatives are still willing to defend the debt ceiling because they buy a reasonable, public-choice-flavored argument in its defense. To permanently do away with the debt ceiling, fiscal conservatives who oppose it must offer a clear answer to this defense that looks at the debt ceiling’s benefits and costs, as well as what could take its place.
The sophisticated defense of the debt ceiling goes something like this: If purely rational decision-makers were in control of our budgeting process, it’s true we wouldn’t need a debt ceiling. They would realize that choices about levels of spending and taxation imply another decision about necessary debt accumulation. But we don’t have a rational process; we have a political one. Politicians always have the incentive to please myopic constituents by spending more and taxing less, and they would like to sweep the consequences under the rug. Happily, the debt ceiling makes it harder for them to do that by forcing separate consideration of debt. Quite sensibly, Americans overwhelmingly disapprove of “more debt,” so they don’t like raising the debt ceiling. Sure, they don’t fully think through the implications of not raising the limit — recent polls revealed that more than a third of Americans believed that raising it was not essential. But the electorate’s distaste for debt still makes the showdowns opportune moments for considering the big picture and charting a course away from profligacy and fiscal ruin.
That argument is coherent and plausible-sounding, but that does not make it correct. And in fact, it suffers from a fatal flaw: Once fiscal-conservative opposition to debt coalesces around the mechanism of the debt ceiling, it has nowhere to go and must be dissipated in surrender. Republicans’ recent back-down was completely predictable
Far from offering fiscal conservatives a potent weapon, the debt ceiling represents a kind of roach motel for opponents of debt: They can go in for the chance to make self-righteous jeremiads, but they can’t escape until they’ve capitulated. The debt ceiling thus ensures that opposition to debt accumulation remains largely in the realm of the rhetorical.
A number of fiscal conservatives look back at the negotiations from 2011 and draw a very different conclusion: Then, they say, the debt ceiling did provide great leverage for fiscal conservatives to demand spending cuts. But they have drawn the wrong lesson. The debt ceiling has provided occasions for anti-debt speechifying for decades, and these moments have almost never yielded lasting budget change. Nor did it really provide the decisive advantage to Republicans in their marginally successful 2011 fight.
Instead, Republicans had leverage thanks to their historic gains in the 2010 congressional elections. President Obama felt compelled by that political result to seek some kind of “grand bargain” on spending cuts. There’s a good case to be made that more sensible and durable budget cuts could have been negotiated if the debt-ceiling deadline had not summarily ended the deliberations and left us with a hapless supercommittee and backup sequester, which remains likely to be reversed or quietly whittled away in the years to come.
So much for the supposed fiscal-conservative benefits of the debt ceiling. What about the costs?
Two kinds of defenders of the recent Republican debt-ceiling maneuver view the costs in different ways.
Type-1 defenders see the world and economics radically differently than I, and mainstream economists, do, and say that embracing the hard discipline imposed by a frozen debt ceiling would be no big deal, or even a good thing.
Type-2 defenders have a far more subtle argument: They say that debt-ceiling showdowns will always end in debt-ceiling raises, and that makes them okay. This is a somewhat puzzling argument — if everyone were to believe it, after all, then there would be no point in pretending that debt-ceiling negotiations offer anyone negotiating leverage. But, as noted above, debt-ceiling defenders tend to argue from a kind of realist perspective, and so they have a natural retort. Not everyone — in the electorate or in Congress — clearly sees the certainty of this endgame, and so threats retain some potency. Fiscal conservatives get a chance to take a stand against deficit spending, which will sometimes have beneficial effects, and when one thinks calmly and clearly about how the debt-ceiling game will end, the expected costs are nonexistent.
Others have done a good job of explaining why the Type-1 defense is badly mistaken, and I have argued above why I think the benefits of brinkmanship envisioned by Type-2 defenders are likely illusory.