There are (much) better ways to control US spending than a debt ceiling

Like a malign comet, the debt-ceiling debate has swung into the skies of American politics again, as it does at regular intervals. And everyone from economists to pundits to everyday Americans can already feel the fatigue of the partisan politics playing out through this deliberately manufactured crisis.

So why not do away with the debt ceiling already?

Designed a century ago to let Congress weigh in on government debt only if it crossed a threshold, rather than having to approve every individual bond sale, the debt ceiling is now routinely used to hold the government hostage. The consequence of blowing past the debt-ceiling deadline (Oct. 18, in this case) without raising the limit is the US defaulting on its debt obligations—a prospect so unthinkable that no party would allow it to happen. “It’s crazy for us to keep playing this game where we pretend that the US is about to throw the world’s financial system into disarray by not paying what it owes,” said Philip Wallach, a senior fellow at the American Enterprise Institute.

Most other countries don’t have a debt ceiling, yet we don’t see defaults on national debt all around the world. So there are a number of alternative models for the US to consider if it wants to control spending without the periodic pain of debt-ceiling brinkmanship.

The US should just get rid of its debt ceiling

The chief problem with the debt ceiling is that it is divorced from actual decisions on spending and taxation, which happen during the budgetary process, said Donald Marron, the director of Economic Policy Initiatives at the Urban Institute. Congress first approves government spending via its budget; then, months later, the debt ceiling battles begin, when legislators snatch the opportunity to call into question expenditures that have already been endorsed. “It’s like using your credit card and then not paying the bill at the end of the month,” Jacob Kirkegaard, a senior fellow at the German Marshall Fund of the United States, said. “It’s political malpractice.”

One way out of this is to dissolve the debt ceiling, and instead to negotiate and argue about spending during the budget process itself—a common parliamentary procedure in many parts of the word. “Most countries’ legislatures don’t involve themselves one bit in debt issuance,” Wallach said. “They make spending and tax decisions, and then tell their treasuries: ‘Now you go find out how to fund the government.’ I don’t think that’s crazy at all.”

And doing away with the debt ceiling is legal. Wallach pointed out that one reading of the Constitution perhaps suggests that Congress cannot subtract itself from debt oversight. But David Super, a law professor at George Washington University, told the Washington Post that the Democrats today can constitutionally repeal the debt limit altogether via a reconciliation bill.

Instead, Congress can focus on the government’s budget deficit: the difference between what it spends and what it earns. Kirkegaard noted that European Union countries, for instance, are prevented from running deficits greater than 3% of GDP. So in a country like Germany, he said, “you have something like a deficit brake. So it says: ‘Okay, in normal times, this is the deficit rule, but you can suspend the rule during a recession.’ That’s the logical thing to do.”

How to make the US debt ceiling irrelevant

Jacob Kirkegaard’s home country, Denmark, is one of the few others around the world to have a debt ceiling. It was introduced in 1993, Kirkegaard said, purely for an administrative reason. Debt management had recently been turned over to the central bank, but since the bank was an independent body, the Danish parliament had to keep watch on debt in some way: hence the debt ceiling.

Then, in 2010, in the wake of the financial crisis, Denmark rendered the debt ceiling irrelevant nearly overnight. Recognizing that it had to spend in the teeth of the recession, the Danish parliament doubled the ceiling from 950 billion Krone ($170 billion in 2010 dollars) to 2,000 billion Krone. The new ceiling was so far from Denmark’s debt levels that it effectively didn’t matter. The decision was made, Kirkegaard said, to ensure that the debt ceiling “could never be used as a political weapon, the way it is in the US.”

In the US too, Donald Marron said, a lot of policy wonks talk about the Denmark model as a possible way out: “Just suck it up and add an extra digit or two to the debt ceiling number. That way the limit still exists, but it won’t torment you for a decade or two.” (Another workaround: mint a trillion-dollar coin.) But Marron suspects the political will to make it happen is slim. John Yarmuth, the chair of the House Budget Committee, came to the same conclusion in remarks to reporters. He’d like, he said, to boost the ceiling to an “extraordinarily large amount that we’ll never reach,” but then added, “that’s probably not viable politically.”

Tweaking the US debt ceiling

Even as a way to check debt, the ceiling is formulated poorly. Donald Marron pointed out, for instance, that rather than setting the ceiling as an absolute number ($28.4 trillion today), it should perhaps be expressed as a ratio of the GDP or some other figure that changes with time. This was discussed quite frequently a decade or so ago, Marron said. “But then the suspension process”—the recent governmental habit of sidestepping debt-ceiling issues by simply suspending it for two years at a time—”sidelined a lot of those conversations.”

The debt-to-GDP ratio isn’t entirely perfect either, Marron pointed out, because changing interest rates can skew the ratio. “Then maybe you can say that you should look at what you’re paying to service your debt, and use that as a measure.”

Another much-discussed measure is to make the debt ceiling “semiautonomous,” to use a term from a paper by the economists Joseph Stiglitz, Peter Orszag, and Robert Rubin. In this scenario, the debt ceiling would respond automatically to changes in the business cycle—to shifts in GDP growth, say, or in unemployment data. Germany’s “deficit brake” is calibrated in this manner, so that during a recession, for instance, the government has the latitude to spend more. “You could write a formula, and enact it into law or even into the Constitution,” Philip Wallach said. “Putting math in the Constitution strikes people as funny, but there’s no reason why it should be problematic.”

The debt ceiling is painful because of US politics

By one argument, the debt ceiling isn’t the problem at all. After all, the ceiling was raised with relatively little acrimony 74 times between 1962 and 2011. What’s truly broken, Kirkegaard said, is the political system, which is riddled with the “absurd level of partisanship” that makes the ceiling a recurring headache.

Marron sighed quite a few times in talking about the debt ceiling. He’s spoken about the problem so many times, he said, that he feels “sort of worn out” and quite pessimistic that politicians want to consider any new set of rules to control debt. But if defusing the political climate feels like an impossibly tall order today, that’s an even more urgent reason to revamp the debt ceiling—so that the government’s spending programs don’t have to be menaced by the threat of default again and again.