Congress has a curious way of doing financial business: It agrees to spend money and then periodically threatens not to pay the resulting bills.
It is a bizarre and potentially dangerous political ritual, unique among national governments around the world, that involves the statutory federal debt limit.
Yet another crisis over raising that limit is looming, and it comes at a time when elected officials in Washington seem to have trouble meeting even their most basic budgetary responsibilities.
Treasury Secretary Steven Mnuchin is relying on “extraordinary measures” to avoid exceeding the current debt limit, as his predecessors were often forced to do in the past.
But unless the debt limit is raised, these measures will be exhausted as soon as September. Mnuchin has urged Congress to take action before its August recess. Lawmakers, however, continue to procrastinate.
Unfortunately, misconceptions abound on the federal debt limit. It is widely assumed that the limit imposes some sort of discipline on the nation’s fiscal policies. Actually, it doesn’t.
One might even argue that the debt limit in its current form enables fiscal mismanagement rather than correcting it.
As the Government Accountability Office has explained: “The decisions that create the need to borrow are made separately from — and generally earlier than — the decisions about the debt limit.”
The federal debt limit lacks any direct ties to spending and tax decisions, or to the state of the economy. When the federal debt nears the limit, Congress must raise it simply to pay the nation’s bills.
If this is not done on time, the United States would default on some of its financial obligations. This would risk chaos in global financial markets, and economic consequences that many experts as well as the Treasury Department warn could be “catastrophic.”
A default would needlessly worsen the country’s creditworthiness and likely mean that American taxpayers would be paying higher interest rates on the federal debt in the future.
Finally, a default would undermine the nation’s position of global leadership, with investors and countries around the world denouncing the United States as a feckless deadbeat.
And who could blame them?
Yet many elected officials in Washington talk as if raising the debt limit is optional — and even an opportunity for political leverage. This further confuses many Americans about the issue.
A recent poll, in fact, found that many Americans do not think Congress should raise the debt limit. They have good reason to be concerned about the debt, which is already high by historical standards and projected to grow rapidly in the years ahead.
But defaulting on the nation’s obligations would do nothing to change the underlying policies that produce the growing debt. It would more likely make the fiscal situation worse. Responsible elected officials should be explaining this to their constituents, not fostering misconceptions about how the debt limit actually operates.
“Congress has always met its responsibility to authorize the borrowing needed to pay America’s bills,” explain Jason Furman and Rahit Kumar in a recent Wall Street Journal guest column. “Over the past several decades, however, lawmakers have made an increasingly regular practice of using the debt limit as leverage, flirting with default as a way to get concessions from the other side.”
Furman, who will speak at a Concord Coalition program this Thursday in Washington, served as chairman of the Council of Economic Advisers in the Obama administration. Kumar was policy director and deputy chief of staff to Senate Republican Leader Mitch McConnell for several years.
While they disagree on many subjects, they agree in their column that “whatever residual value the debt limit may have is far outweighed by the risk that a potential U.S. default poses to the global economic order.”
Their conclusion: Congress should repeal the debt limit and find “a new mechanism” to deal with the debt issue.
“Lawmakers are right to be concerned about steep increases in the debt,” they write. “But those worries should be expressed when the policies that actually increase the debt are voted on.”
The Concord Coalition has long voiced similar concerns and called for reforms that would tie the nation’s debt to an economically relevant standard — such as the economic growth rate — and would align debt limit increases with the policy decisions that would make these increases necessary.
As Concord Executive Director Robert L. Bixby has put it: “If the main purpose of the debt limit has simply become an opportunity to provoke a crisis, it would be best to scrap the current system and replace it with a more rational and effective alternative — one that provides more than a false impression of fiscal rectitude.”