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On the Debt Limit

It appears that the necessity to raise the debt limit is again becoming a looming issue for Congress, and just like the last time, I think this whole debate is stupid and easily avoidable. Just to get the simplest points out of the way, here are a few things I feel are obvious and true about the debt limit:

  • Not increasing the debt limit leads directly to a failure to pay obligations to which Congress and the United States Government have already agreed.
  • The budget (and associated appropriations bills) determine and authorizes government expenditures, while the debt limit simply allows us to pay for those expenditures which have already been approved and allocated.
  • Due to inflation and economic growth, as long as the debt limit is given in terms of a dollar amount, that limit will always have to increase, ad nauseam; always.

Let’s address that last bullet. First of all, history shows that this is accurate. Under Ronald Reagan, the debt limit was increased 14 times in eight years.  Under George W. Bush, it was increased seven times over eight years. Sometimes, it was a pretty big Congressional fight, to be sure. However, the brinkmanship of the 2011 debt limit fight appears to be fairly new. Also new is the idea that raising the debt limit should be conditional upon spending cuts. As I said in my second bullet point, when crafting a budget, spending levels are determined and authorized. A failure to increase the debt limit accordingly only means that you are failing to meet the financial obligations that you have already approved.  (You, in that case, being any Congressperson). So the debt limit has always needed frequent increases, and will always need frequent increases. Making it a big fight seems very counterproductive in the most literal sense–as fighting over the debt limit literally takes time away from accomplishing anything else in Congress (such as passing a budget).

Fighting over the debt limit and using brinksmanship has other counterproductive results, as well. For instance, by creating a serious doubt as to whether or not the United States will repay its debts and pay its interest on time, the credit rating of the United States Government was downgraded by Standard and Poor and by a Chinese ratings agency for the first time. Such a move could, in theory, lead to the United States being charged higher interest rates on its borrowing, therefore increasing government spending on interest payments and actually working counter to the desire to decrease the debt. And just to be clear, it was not the level of debt held by the United States that led to these downgrades. It was the scare that the debt may not be paid for and the incompetence of Congress, as specifically stated by Guan Jianzhong, the chairman of the Chinese ratings agency:

“The squabbling between the two political parties on raising the U.S. debt ceiling reflected an irreversible trend on the United States’ declining ability to repay its debts. The two parties acted in a very irresponsible way and their actions greatly exposed the negative impact of the U.S. political system on its economic fundamentals.”

So I think we have established here that the debt limit will always have to increase when it is listed as a dollar figure, that it historically has been increased several times, that attaching spending cuts to the increase is a new phenomenon that should be handled during negotiations on the budget, and that fighting over its increase is highly counterproductive to U.S. interests. Now for the most frustrating part: the solution is simple. I mean, it’s really simple. I can’t take any credit for thinking of it, because several countries already use such a system. Here it is: The debt limit should be set at a percentage of Gross Domestic Product (GDP). This way, as inflation increases, the debt limit does not have to be changed by Congress. As the economy grows, the debt limit does not have to be changed by Congress.

The simple solution actually makes so much sense that you have to wonder if Congress has avoided it because they particularly enjoy their infighting. It’s pretty clear that many Republicans are operating under the confused notion that standing up against the debt limit increase is the same as standing up against the debt. However, as has been repeatedly stated, they are only standing up against meeting already-agreed-upon financial obligations.

Recently, the level of U.S. central government debt surpassed 100% of GDP. This is of course troubling news, and especially so when you look at research performed by economists from Harvard and the University of Maryland that states that reaching 90% of GDP begins to be problematic even in advanced economies. Obviously, a defender against debt would want to see that number lowered, so any proposed debt-to-GDP ratio could be imposed such that it is realistic in the short term, but could be walked down to a more tenable number in the long-term.

I would suggest that a limit of 105% could be imposed with that number beginning to decrease by one or two percentage points per year in a couple of years until it reaches 70%. Yes, that is around a twenty-year plan. The most current estimate I can find for debt-to-GDP is 101.5%. It figures that it would take afew years to slow the growth of that number responsibly, and from that point on, once growth is restored to a lagging economy, there should be a focus on reducing that percentage. By putting the gradual reduction into one plan, however, the near-annual debate in Congress could be tabled for quite some time.

Personally, I would target an actual debt level of 60% debt-to-GDP, with a limit of 70%. If a country spends too close to its limit when times are good, there is little or no wiggle room when times get tough. This sounds unrealistic, though, to believe that Congress would ever have the foresight and discipline to spend less than their mandated limit. That would require a level of Congressional competence I haven’t seen in my short adult life. One can only dream, I suppose. But getting rid of this whole embarrassing fight about whether or not to pay our nation’s bills on time? That, I think, even the simplest of Congresses should be able to handle.

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