Can someone more versed in economic issues explain why we are having a faux-debate over the debt ceiling?
Here is my understanding of how the debt ceiling works: Congress votes to spend money that the government doesn’t have and then tells the Treasury department to borrow the money (in the form of government bonds) so that they can pay the bills. But refusing to raise the debt ceiling is simply telling the Treasury department that it is no longer authorized to borrow money—it doesn’t change the fact that the money has already been (or soon will be) spent. In would be like you spending $15,000 using your credit card and then calling Visa to tell them not to increase the limit above $10,000.
As former Reagan domestic policy adviser Bruce Bartlett, once said:
As far as I am aware, no other country on Earth has the idiotic policy that the United States has of having a legal limit on the amount of bonds the central government can issue. They correctly recognize that the deficit and the debt are simply residuals resulting from the government’s tax and spending policies. It makes no sense to treat the debt as if it is an independent variable.
Presumably those who oppose raising the debt ceiling are aware that it has no beneficial effect on spending. The debt ceiling has been raised over a hundred times and it will be raised again. So why do they do it? Is it simply a political dog-and-pony show to confuse the less economically savvy into thinking they are actually doing something? Or is there a substantive reason for the stance that I’m missing?
May 16th, 2011 | 1:26 pm
“Is it simply a political dog-and-pony show to confuse the less economically savvy into thinking they are actually doing something?”
I assume this whole post is meant to be rhetorical, right? The answer is perfectly summed up by looking at the stance on the debt ceiling of the current occupant of the White House back when he was a senator of the opposite party of the guy in the White House at the time.
May 16th, 2011 | 1:38 pm
Hello, Mr. Carter,
You wrote:
“Is [raising the debt ceiling] simply a political dog-and-pony show to confuse the less economically savvy into thinking they are actually doing something? Or is there a substantive reason for the stance that I’m missing?”
Great question. Let me throw out a few more questions.
First, please listen to:
http://www.youtube.com/watch?v=wI_oocjB3A8
There you will hear presidential candidate Herman Cain make the following remark contrasting Federal Reserve policies when he was chairman of the Federal Reserve Bank of Kansas City with their current policies:
“Then we didn’t have a 14 trillion dollar national debt that we were trying to pay off with the Federal Reserve printing money to buy our own debt. That’s like incest.”
Are we actually paying interest to private bankers on money we just printed up ourselves? How much of our debt is like that?
May 16th, 2011 | 1:41 pm
If it really came down to the hilt, I’d advise Obama to just tell Treasury to go ahead and keep borrowing. The ‘government shutdown’ pseudo-incident earlier this year was a creation of reading the Constitution a bit too hyperliterally when combining 18th century instructions with 20/21st century bookkeeping. Congress authorized the spending already, authorized the taxes already, that’s done then.
May 16th, 2011 | 1:46 pm
That said, the ceiling might serve some useful legalistic functions. For example, in accounting ‘spending’ usually means expenses, but purchasing assets usually isn’t considered spending. For example, a company that takes the cash it earns at the end of the month and puts it in a savings account isn’t ‘spending’ by purchasing shares of that account….
Without something like a ceiling you could have a situation where a Treasury secretary starts borrowing above what is needed to fund authorized spending and starts doing things with the cash like buying up Euros (say if we were in a trade war with the EU, we might buy up Euros to make the Euro more expensive, the dollar cheaper thereby making our exports more attractive). You could argue that this isn’t technically spending so it isn’t violating anything requiring Congress to authorize it.
May 16th, 2011 | 2:44 pm
It is a crime for member of the executive branch to spend money that has not been appropriated by Congress (The Anti-deficiency Act).
It is one of the few crimes members of the executive branch can violate often unknowingly inthe course of their duties. Congress has self-limited the amount of money it can approriate for spending. Therefore it must raise the debt ceiling or turn almost the entire executive branch into criminals.
May 16th, 2011 | 3:52 pm
@Joe McFaul: Hey, thanks! I learnt something today!
I’m going to skip the obvious joke about “turning” the executive branch into criminals.
May 16th, 2011 | 4:06 pm
I think Joe’s point is that Congress authorized the spending so why the need to authorize the borrowing?
May 16th, 2011 | 4:10 pm
I think Joe’s point is that Congress authorized the spending so why the need to authorize the borrowing?
Exactly. It’s a bit silly to borrow the money and then refuse to allow your creditor (in this case, the Treasury Dept.) to pay the bill that you ran up.
You’ve been agreeing with me way too often, Boonton. It’s like we crossed over into Bizarro world. ; )
May 16th, 2011 | 4:21 pm
A Russian joke: “Two economists meet. One asks the other: ‘You understand what’s happening?’ The other responds: ‘Wait, I’ll explain it to you.’ ‘No, no,’ says the first, ‘explaining is no problem, I’m an economist, too. What I’m asking is: do you understand?”
May 16th, 2011 | 8:45 pm
“In would be like you spending $15,000 using your credit card and then calling Visa to tell them not to increase the limit above $10,000.”
It would be, not “In would be.”
May 17th, 2011 | 7:40 am
The only thing I can think, like I said, is that you may have some legal problems if the Treasury doesn’t have something like a debt ceiling. One example is borrowing lots of money to buy Euros as part of some trade war. Another might be a Treasury that is trying to conduct its own monetary policy, say by issuing debt but then locking up the cash rather than spending it (say as a way to decrease the amount of money operating in the real economy). Such a Secretary could argue that since he isn’t actually spending anything he hasn’t violated the Constitution’s rule that spending be authorized by Congress.
As for us agreeing too much, I think we always did agree on a few things here and there. Two broken clocks are right per day twice as much as one ;)
May 17th, 2011 | 9:17 am
As I heard it explained by the NPR Planet Money guys, the debt ceiling is a bit of a historical artifact.
Back before World War I, congress specifically authorized each individual issuance of a debt security by the Treasury. With the War, the debt system got to large and complex for congress to deal with directly, so they authorized the Treasury to make its own debt-issuance decisions. However, they didn’t want to give up complete control over how much debt the Treasury issued, so they imposed a debt ceiling limiting the total debt that the Treasury could issue.
Fast forward to the point at which the whole Federal Government is financed by a super-complicated debt system, and now having a debt ceiling doesn’t really make much sense. But it would look bad politically to just abolish it, so instead there’s just a perfunctory vote to raise it every time spending exceeds it.
But these perfunctory votes are still fun opportunities for congress-types to pretend they care about fiscal responsibility. And since it’s always going to be raised anyway, there’s no drawback to all the grandstanding.
May 17th, 2011 | 9:47 am
Keep printing money, just like Germany in the 1920′s.
Look what it got in the 1930′s.
May 17th, 2011 | 9:55 am
It’s not an economist you need to explain this, Joe, it’s a political scientist. So here I am!
The question here is not whether we’ll raise the debt ceiling. Nobody is arguing about whether we’ll raise the debt ceiling, because everyone in DC – well, everyone in DC who matters – agrees that the debt ceiling will be raised.
The question is whether we should pass a law that just raises the debt ceiling and nothing else, leaving us on our current track to fiscal Ragnarok, or tie the raising of the debt ceiling to some level of fiscal reform.
Why not keep the debt ceiling and fiscal reform separate? Because Congress never does anything painful unless it has to. The need to raise the debt ceiling creates political momentum for fiscal reform. The minute you raise the debt ceiling, the momentum for reform vanishes and the chances of actually enacting any kind of reform drop to zero. (At least, until the next time we need to raise the debt ceiling.)
Some are insisting that raising the debt ceiling must be tied to meaningful fiscal reform, because they know that otherwise no meaningful fiscal reform will occur. Others are insisting that raising the debt ceiling must not be tied to fiscal reform – and for exactly the same reason.
In point of fact, it is clear to everyone that if you call a vote on a debt ceiling bill that doesn’t contain meaningful reform, the House will vote it down. Thus, in private, the real discussions are over how much and what kind of reform will gather enough support to pass both houses of Congress and be signed by the president.
The big public fuss and predictions of immanent armageddon on both sides are in service to those behind the scenes negotiations. The more the public can be convinced that raising the debt ceiling without reform leads to disaster, the more the reformers can expect to get at the bargaining table behind the scenes. On the other hand, the more the public can be convinced that raising the debt ceiling needs to happen immediately or the nation will instantly collapse, the more the anti-reformers will get at the bargaining table.
May 17th, 2011 | 10:06 am
Why not keep the debt ceiling and fiscal reform separate? Because Congress never does anything painful unless it has to. The need to raise the debt ceiling creates political momentum for fiscal reform.
That would make sense if the people who were against raising the debt ceiling were not the same people who voted to authorize the spending. I’m sure there are a few freshman representatives that are able to be consistent on this issue. But it seems a bit silly for people like John Boehner to make a fuss about it now when he joined in voting the spending bills that caused the problem in the first place.
And both sides are simply pandering to their respective bases. The Democrats won’t go for spending cuts and the Republicans won’t agree to revenue increases. Eventually they’ll all agree to raise the debt ceiling without making any substantive changes to the actual debt.
Am I wrong about that? Is there a chance that some legitimate reform may come of this debate?
May 17th, 2011 | 10:22 am
For me, the question that springs to mind is, “Would an EMP strike to set everything back to zero be a good thing or a bad thing?”
If ever the government has an incentive to use covert action, under the guise of “terrorism”, to manipulate the things in its favor, this would seem to me to be it.
I am, of course, being facetious…
May 17th, 2011 | 10:38 am
@Joe Carter: You wrote, “Am I wrong about that? Is there a chance that some legitimate reform may come of this debate?”
You’re not wrong, but you did neglect to add “or any debate in Congress.”
May 17th, 2011 | 10:39 am
@Artaban: Has somebody been watching Dark Angel?
Um, er, I know about that show because a friend told me…um, yeah. That’s it.
May 17th, 2011 | 1:01 pm
Keep printing money, just like Germany in the 1920′s.
Actually we aren’t, we’re borrowing money with a little bit of ‘printing’ going on but really two different things. And we should actually do more of both until unemployment goes down and inflation breaks beyond the under 2% mark.
Look what it got in the 1930′s.
Actually the German hyperinflation started in 1921 and ended in 1923, and in 1923 it really ended. With the introduction of a new currency and strict control by the central bank inflation more or less ceased. Hitler didn’t come to power until about a decade after that. Hitler actually came to power in an era of declining, not increasing prices.
May 17th, 2011 | 1:58 pm
Hypocrisy on all sides is certainly one part of this story. In politics, it always is. However, there are also legitimate factors at work here. Collective decision making in a large body made up of members with extremely diverse agendas (including both sincerely felt ideologies and rank self-interested maneuvering) simply does not work the same way as decision making by an individual. If an individual member of Congress could write the entire budget himself, he might or might not follow a logical, coherent process in which all steps are aligned with one another and the justification for doing each step correlates with the justification for doing each other step. But no one person is writing the budget. The budget is produced by a gargantuan, messy process with many thousands of moving parts, all of which are under the control of thousands of people (congressmen, staffers, etc.) with very diverse agendas. That kind of process simply cannot proceed according to a rational, consistently justifiable procedure even if everyone involved were perfectly honest and virtuous (which of course they’re not). The kind of moral and intellectual consistency you are demanding cannot exist in any large decisionmaking body, much less in a body where the agendas of the participants are so diverse. Given that, there is nothing unethical about voting for a budget that contains deficits and taking your stand against deficits somewhere else – because you want to take your stand at the point in the process where it will do some good, not where it won’t.
May 26th, 2011 | 3:50 pm
[...] “What’s the Deal with the Debt Ceiling?,” Joe Carter, First Things [...]
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