Only Thing Wrong With the Debt Ceiling Is the Lag

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By Caroline Baum

Lots of people want to get rid of the debt ceiling, the federal government's statutory borrowing limit. When one considers that it enables the Treasury to borrow money Congress has already spent, it seems like a silly relic. Even worse, the vote to increase the debt limit has become a political football, with each party using it as an opportunity to extract concessions from the other. No wonder some folks say it's time for it to go.

Not so fast. The problem with the debt ceiling isn't the concept: the president and 535 members of Congress need a symbol to remind them just how much they spend each and every day. Rather, the problem is the lag relative to decisions on spending.

Then I thought of my friend Bob Laurent, economist extraordinaire, who died in 2005. Bob spent most of his career at the Chicago Fed. When the Fed was having trouble hitting its money supply targets in 1979, Bob came up with a simple solution (it was considered controversial at the time). Instead of the existing system of lagged reserve accounting -- banks' required reserves were determined by the level of deposits two weeks earlier -- Bob proposed a lead, or "reverse lag," method wherein the Fed would set the level of required reserves today and the banks would have to adjust deposits accordingly.

Therein lies the answer to the debt-ceiling dilemma: adopt Bob's lead, or "reverse lag," system. For those who say they want to cut spending, here's their chance. Right now, the sky's the limit. Congress needs to set the borrowing limit first and work within those confines. At minimum it will separate the real, limited-government advocates from the false prophets.

No platinum coins needed, no test of the president's powers under the 14th Amendment. Just reverse the lag. Bob thought of that a long time ago.

(Caroline Baum is a Bloomberg View columnist. Follow her on Tw itter.)


-0- Jan/09/2013 16:25 GMT