 n a few weeks, Congress
will have to raise the public debt limit. The Treasury Department
estimates that it will run out of borrowing authority some time in
March, jeopardizing the timely payment of government bills, including
Social Security benefits. It goes without saying that Congress will,
in the end, raise the debt limit. However, the debate is likely to
be more contentious than usual this year, as Democrats seek to blame
last year's tax cut for rising federal debts.
In fact, the tax cut has almost nothing to do with the need to
raise the debt limit. In any case, the debt limit applies to a decreasing
portion of the government's total indebtedness, most of which rises
without the slightest congressional scrutiny.
Up until World War I, there was no debt limit. Congress had to
authorize each individual debt issue. It decided exactly how many
bonds would be issued, what their maturity would be, and the maximum
rate of interest that would be paid. In an era when the federal
debt was small, this system worked. But with the unprecedented need
for federal borrowing during the first World War, Congress concluded
that the Treasury Department was better able to make technical decisions
about the maturity of government bonds. In the Second Liberty Bond
Act of 1917, Congress gave it general authority to issue bonds of
any maturity with any interest rate, subject to an overall limit.
Thus began the debt limit debate. Since at least the 1950s, raising
the debt limit has been extremely difficult for both Republican
and Democratic administrations, even when Congress has been under
the same control. Raising the debt limit has been viewed by many
members of Congress as a "litmus test" of their fealty
to fiscal discipline. Hence, many members refuse to vote for a debt
limit increase under any circumstances.
Whatever one thinks about the rationale for raising the debt limit,
as a means of controlling federal indebtedness it has demonstrably
been a failure. There are important reasons why this is even more
true today than in the past.
First, an increasing share of the debt subject to limit is held
internally in government accounts. Second, more and more of the
government's total indebtedness is not subject to the debt limit.
These facts raise serious questions as to whether the debt limit
serves any useful purpose in this day and age.
It is important to understand that the formal debt limit applies
to the gross federal debt. This includes debt held by the public
plus that held in trust for Social Security, highways and airports,
and other purposes. These latter debts are held within the government
itself and do not require the Treasury to borrow from the general
public. In effect, the debt held in trust is economically meaningless.
The only measure of federal borrowing that matters is how much the
federal government takes out of private financial markets, which
may "crowd out" businesses and other borrowers.
In recent years, the portion of the gross debt that is held by
the public has sharply declined from 75% in 1990 to 57% last year.
The reason is mainly due to growth of debt held in "trust."
This is simply a fancy term for making an accounting entry on the
government's books that says general revenues can pay certain bills
in the future.
The hard truth is that the Social Security "trust fund"
bears no resemblance to those that exist in the private sector.
There is no ownership right and benefits are unrelated to assets.
The much-discussed Social Security trust fund is just an accounting
device, nothing more. It is like a "debt" that a husband
owes to his wife or children. It may be important to them, but has
no meaning outside the family.
This obsession with the Social Security trust fund has serious
consequences, however, which is to divert attention from the federal
government's growing off-budget debt. Much of this is accumulating
in what are called "government-sponsored enterprises"
or GSE's. These include entities such as Fannie Mae, which borrow
vast sums on their own authority, but with an implicit government
guarantee. At the end of October, these agencies had outstanding
debts of more than $3.1 trillion.
To put this government debt in perspective, the debt held by the
public was just $3.3 trillion. However, this really overstates the
figure because the Federal Reserve held $534 billion of that. Since
the Fed is part of the government, that debt is essentially meaningless,
leaving a net debt of $2.8 trillion. Thus GSE debt effectively exceeds
the national debt.
Many economists have long believed that the debt limit is simply
an anachronism, an opportunity for members of Congress to grandstand
against the federal debt, even as they vote to increase spending
year after year. The debt limit increase is a charade, which does
nothing to actually hold down federal indebtedness. It is long past
time that it should be scrapped.
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