The Corner

How to Assess the Debt Ceiling

Yesterday over at the Washington Post, Zachary Goldfarb pointed to a survey from the Booth School of Business at UChicago, which found that 84 percent of economists agree with the following statement:

Because all federal spending and taxes must be approved by both houses of Congress and the executive branch, a separate debt ceiling that has to be increased periodically creates unneeded uncertainty and can potentially lead to worse fiscal outcomes.

(Booth’s IGM forum regularly does these kinds of surveys of economists — one notable aspect of them is that on more obscure topics, some economists will admit that it’s not their area of expertise and abstain, not wishing to express their view as a qualified economist on that topic. Something for Paul Krugman to consider?)

Anyway, as at least one economist pointed out in the comments section, this is something of a truism: Obviously negotiations over whether to extend the government’s ability to pay its bills create “uncertainty” which, by raising the risk premium on interest rates and depressing economic growth and therefore tax revenue, can “worsen fiscal outcomes.” (As I detailed yesterday, we can assess some of these costs based on past events.) The only conceivable economic benefit of the debt ceiling is that the restraint it can impose on government spending is so helpful for the U.S. economy that it outweighs the costs of fiscal uncertainty and the increased risk of default (and in that view, the massive fiscal contraction of hitting the debt ceiling should be a neutral or positive event) — obviously, this is a view held by almost no economists.

The debt ceiling exists not because it’s good economic policy, but because our written Constitution says that Congress, not the executive branch, controls the purse — taxation, spending, and the issuance of debt. In 1917, Congress decided to delegate much of the power to issue debt to the U.S. Treasury, but instituted the debt ceiling as a replacement (previously, Congress had to set and approve the rules for each Treasury auction — now it would just be able to do so up to a certain point). This change was in part borne out of what you might consider economic (or at least, practical) considerations: Congress decided that, at a time of war, the process of raising debt had to be streamlined. So, one might contend that in our current situation, too, the economic costs of the debt ceiling are great enough that our political arrangement must be altered — but this time it would be a difference in category rather than degree, in that Congress would give up all its explicit power over the issuance of federal debt, and the executive branch would be free to borrow whenever and however it wanted. It is thus certainly not sufficient to say, “30 economists agree: It is bad economic policy,” and should therefore be done away with (not that Goldfarb is implying this).

That, it seems, would require a conversation about how much power we want to grant each branch of government — in addition to whether it is constitutional for Congress to delegate all of its borrowing power — a discussion in which economic expediency can be taken into account, but is not the key issue. Constitutions are written to make men free, not rich (though ours has done rather well at both). #more#Further, as Charlie Cooke pointed out to me this morning, though our constitution empowers Congress to do any number of things that would have disastrous effects — invading Canada, for instance — we don’t try to restrain them by taking away their power to do these things.

It is, understandably, a common trait among pundits (for the most part, liberals) whose experience, expertise, and interest lie more in economics and policy rather than history or politics to measure solely the economic effects of proposals or laws. Thus, when they succumb to the temptation to make political pronouncements (or when it becomes their job to do so), they proclaim that something ought to be done (#mintthecoin) or prohibited (withholding the authority to borrow) while ignoring the political, legal, and constitutional considerations, especially the more abstract ones. For instance, advocates of the U.S. Treasury’s unilaterally minting a platinum coin focused almost exclusively on its economic necessity — they did bother to argue that it was apparently legal, but had no regard for the fact that it would have been a gross seizure of power and disruption of our system of government (which is probably in part why the president rejected it).

Of course, it is also possible that liberals are not forgetting or misunderstanding the importance of separation of powers when they suggest abolishing the debt ceiling, but that they actually regard the concept as illegitimate or outdated, and thus irrelevant.

Lastly, NRO’s editors suggested on Tuesday that one way to reduce the economic and fiscal costs of having a debt ceiling, and of the consequent debates, is to pass a bill authorizing unlimited issuance of debt to cover existing debt service, but not general spending, thus preserving in large part the current political structure, while managing to reduce some of the economic costs incurred by it (by at least partly calming bond markets).

Patrick Brennan was a senior communications official at the Department of Health and Human Services during the Trump administration and is former opinion editor of National Review Online.


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