The Debt-Limit Fight Is Necessary and Normal

C ongressional battles over the U.S. debt limit allow the press to indulge apocalyptic fantasies. Some claim that a delay in raising the debt limit could cause a “global economic collapse” or would be equivalent to a “nuclear war.”

Yet the U.S. has been engaging in heated debt-limit battles for decades, and, far from sowing economic chaos, such battles have been one of the few things that have helped rein in deficits. While a temporary delay in payments would be unambiguously bad, it would not be the end of the global economy. The greater threats to the economy are the proposals to ignore the debt limit and the ever-growing burden of federal debt itself.

It is important to remember that in the current debt-limit fight, as in previous ones, the debate is not over a long-term default on U.S. obligations, but over a delay in payments. Such delays have happened before. During a debt-ceiling fight in 1957, the Air Force couldn’t pay its bills for a short period. In 1979, a fight about raising the debt limit contributed to delayed payments on over $120 million in U.S. debt, which was called a “mini-default.” Both of these events hurt the national credit, but neither resulted in global meltdowns. According to one analysis, the 1979 incident had little to no effect on borrowing costs.

In the past, the U.S. Treasury market, which would be most affected by any problem with the debt limit, has not thought a delay would be a world-ending event. The Government Accountability Office analyzed the 2011 debt-limit fight and found it added $1.3 billion in extra payments for the U.S. debt in that fiscal year, or about what the federal government was spending every three hours. The effects on interest rates for short-term debt were small or nonexistent. Even if the market was only attributing a tiny likelihood of default or delay, which seems unlikely considering the fiery negotiations, it was implying that consequences would not be as significant as some individual Federal Reserve rate hikes.

Much of the current debt-limit discussion ignores a previous decision to default on the U.S. debt, and in that case it was not just a delay. In 1933, President Franklin Roosevelt, with the eventual acquiescence of a Democratic Congress, stopped making payments to debtholders in gold, as some of the U.S. debt then required, and substituted payments in depreciated paper dollars. As the UCLA economist Sebastian Edwards pointed out in his book American Default, even this extreme event had little effect on the ability of the government to borrow. Although these results are debatable and from circumstances not analogous to our current situation, they should give the current apoplectic predictors pause.

In modern times, justifiable political outrage would prevent any payment delays from lasting more than a day or two. Yet the claim that even a short delay would lead to a global financial crisis has led to proposals that could themselves be catastrophic. Serious thinkers have suggested that the Treasury has the legal authority to mint a trillion-dollar platinum coin and use it to pay off existing debt.

The idea that Congress, in a tiny legal clause dealing with coins for numismatic collectors, gave the Treasury unlimited power to create money is patently absurd. Such an idea would turn the Treasury itself into a new kind of Federal Reserve. The fact that one major advocate of the platinum-coin idea suggested that the president could ignore the Supreme Court and send troops to the Federal Reserve to enforce acceptance of the coin shows the dangers of such an approach. All of this would have far graver consequences for U.S. creditworthiness than a short-term default.

In the past, the debt limit has had real and positive consequences. As my colleague at the Manhattan Institute, Brian Riedl, has pointed out, all of the eight largest deficit-reduction acts since 1985 were tied to debt-limit increases.

The use of the debt limit to control spending has often been bipartisan. In 2006, then-senator Barack Obama said, “America has a debt problem and a failure of leadership. . . . I therefore intend to oppose the effort to increase America’s debt limit.” Just three years later, Democratic senators Kent Conrad, Evan Bayh, and several allies threatened to not raise the debt limit unless Congress or then-president Obama appointed a special commission to control federal deficits, which became the Simpson-Bowles Commission. Democratic senator Joe Manchin has in the past opposed a “clean” debt-ceiling increase and today says both sides should find a way to use the ceiling to control debt.

Although a delay in raising the debt ceiling would not destroy the global economy, it would bring substantial costs and outrage the millions of Americans who depend on federal payments. Anyone in Congress that condoned such a default would and should suffer the voters’ wrath. But Congress cannot ignore that the current federal debt, at over $30 trillion, is an imminent threat to the U.S. economy. Since that debt has increased from about 65 percent of our GDP in 2008 to about 120 percent today, the urgency of action has risen.

Both sides should recognize that the debt limit offers a real but limited opportunity to control deficit spending. This means offering concrete proposals on how to cut costs and coming to a deal before the ceiling is breached. But no one should pretend that our current debt-limit debate represents some unprecedented threat to the public. What is unprecedented is the size of our debt and the seeming unwillingness of politicians to do anything about it.