Someday Congress Won't Raise the Debt Ceiling
Treasury Secretary Steven Mnuchin has asked Congress to raise the federal debt limit above the ceiling imposed by legislators two years ago. According to a recent survey, only a small fraction of the American people -- both Democrats and Republicans -- support an increase. In contrast, a 2013 survey found that the vast majority of economists would like to scrap the debt ceiling. Who’s right? There is an important sense in which they both are -- and that means that the U.S. is likely to face some wrenching political conflicts in the next decade.
Here’s how I interpret what the economists were saying: Congress has the power to make tax and spending decisions. Those decisions typically result in a budget deficit, meaning that the government has to take on a growing amount of debt. But there’s no need to have a separate law to cap the size of the debt: If Congress doesn’t want to it to keep growing, it just needs to spend less, tax more or some combination of the two.
Here’s how I interpret what the non-economists are saying: We worry about the economic consequences of the federal debt getting too large relative to the size of the economy (and, hey, most economists seem to agree with us on that). So, it makes sense to us to have a law that imposes a cap on government debt. The problem is that Congress systematically breaks its own ceiling by making spending and tax commitments that will push the national debt above the statutory limit. Not raising the debt ceiling simply means that Congress will be forced to obey the law by rapidly unwinding those past spending commitments (or perhaps by rapidly increasing taxes to meet those commitments).
In my view, both perspectives have some validity. The economists are undoubtedly right that failing to raise the debt ceiling this summer, or at any point in the future, will cause many short-term (and perhaps longer-term) challenges for the economy. We got a taste of these problems in the summer of 2011 when financial markets became nervous that Congress wouldn’t raise the debt ceiling in a timely fashion.
However, some voters may well see these same economic costs as having longer-term benefits. These voters want to have a credible and durable cap on the size of the federal debt relative to the size of the overall economy. Many of them likely recognize that not raising the debt ceiling this summer (or in the future) would cause large (hopefully short-term) economic dislocations. But their hope is that in the future, the prospect of this very economic pain would be an incentive for Congress to ensure that spending and tax commitments conform to the statutory debt ceiling. These voters would then have a way to ensure that the ratio of federal debt to gross domestic product doesn’t get larger than they want.
My own prediction is that Congress will yield to the administration’s demands and raise the debt ceiling sometime this summer. But the aging of our population means that the federal debt is only going to grow, and it would be surprising to me if voter concerns about the debt didn’t keep pace. If economists don’t like the debt ceiling, they’d better come up with some other mechanism that will allow voters to impose a credible cap on the size of the national debt. Otherwise, I expect that, sometime in the next decade, Congress is likely to yield to constituent pressures and not raise the debt ceiling, despite the attendant economic turmoil that is sure to ensue.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
To contact the editor responsible for this story:
James Greiff at email@example.com