Raising the Debt Ceiling: A Symptom of the Bigger Problem

by Veronique de Rugy

The Hill is reporting that a large share of the American public — 71 percent — opposes raising the federal debt limit, despite the Obama administration’s “warning of dire economic consequences” if it is not raised.a higher limit, while just 18 percent support it. (Treasury Secretary Geithner said last week that the current limit of $14.29 trillion will be reached sometime this spring.)

This chart below — from my article in the American this morning — suggests the public may be on to something. It shows increases in the federal debt and the statutory debt limit since 1940:

As we can see, in the 1980s both the debt and the limit started increasing at a faster rate. Since 2000, the debt limit has been increased ten times; in 2008 and 2009, it was increased twice in the same year. It was increased yet again last year. And it needs to be raised again?

As the chart shows, the debt limit is a very poor budget constraint. First and foremost, it does not alter the spending and revenue policies that determine debt and deficits. But we also need to remember that raising the debt cap is only a symptom, not the cause, of the bigger problem: the endless appetite of the federal government for spending taxpayers’ dollars.

Think about it this way, if you want to lose weight, the only solution is to stop eating. Just telling yourself that you can’t gain an additional 30 pounds this year won’t help. In fact, it will make things worse. Identically, Congress should stop spending money instead of ruling that it should increase the debt by some hundred of billions of dollars this time around.

Arthur Laffer has a great piece in the Wall Street Journal this morning about the debt ceiling. He makes this comment:

Government spending is taxation, pure and simple. That taxation reduces output, employment and production. It’s basic Econ 101. If, instead of using government spending for productive purposes, Congress uses it on bailouts for failing banks and unprofitable businesses, cash for clunkers, housing subsidies and unemployment, it’s a double-whammy for the economy. You can’t raise taxes on people who work, increase what you pay people not to work, and then expect more people to work.

Is anyone on the Hill listening?

Update: This is a good post by my colleague Matt Mitchell about the debt ceiling. He reminds us that debt has consequences:

Economists Carmen Reinhart and Kenneth Rogoff examined the implications of debt in 44 countries over a 200 year period. They found that in economically-advanced countries, when debt-to-GDP ratios moved from around 30 percent of GDP to 90 percent or more, economic growth rates tended to halve. Now the US isn’t a typical country and investors may be willing to let our government get away with debt-to-GDP ratios that are higher than 90 percent.

But certainly they are not going to let us get away with debt-to-GDP ratios of 200+ percent (which is what the CBO projects for 2035), let alone 300+ percent (2047) or 800 percent (2078).

At some point, the federal government will have accumulated too much debt for investors to feel comfortable lending at current rates. At that point, they will demand higher interest rates which will undermine economic growth.

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