With the national debt surging beyond the $20 trillion mark and Congress considering legislation that would produce even higher deficits than are already projected for the coming decade, the federal debt limit is receiving some much-needed scrutiny.
President Trump has suggested doing away with the debt limit, and some lawmakers recently introduced legislation to do so.
Clearly, the federal debt limit isn’t living up to its name, and we should stop pretending that it is.
Not only is the limit failing to hold down the debt, it creates unfortunate opportunities for political grandstanding, partisan cheap shots and fiscal brinkmanship in Washington.
That is because under current law, if the debt limit is not raised in time the federal government would start defaulting on its financial obligations. This would destabilize and perhaps panic financial markets, where a cornerstone has long been the safety of money loaned to the federal government.
Even in a best-case scenario, a default would cause interest rates on the government’s debt to rise, costing American taxpayers more to service the debt for years to come. In fact, the Government Accountability Office has warned that even getting close to the debt limit can cause borrowing costs to increase in the market for Treasury securities.
When members of Congress wait to the last minute to approve a debt increase, using it as a bargaining chip in legislative negotiations, it creates a crisis atmosphere. And government by crisis is risky, inefficient and ineffective. It doesn’t do much for public confidence in Washington, either.
We do have a serious debt problem. Under current law, the debt is projected to grow by trillions of dollars over the next decade, with interest payments becoming the fastest-rising part of the federal budget.
To make matters even worse, many lawmakers who have warned of the country’s unsustainable fiscal path in the past are now singing a different tune, one that calls for large, deficit-financed tax cuts and additional spending in areas such as defense and border security.
So before we simply give up on a debt-control mechanism, we should explore other options that would be more effective.
The best option, of course, would be for members of Congress and presidents to stop enacting policies that produce large amounts of debt in the first place.
In the short term, this means elected officials would at least stop digging the fiscal hole deeper.
In the longer term, they should pursue structural reforms in the budget to rein in the national debt. Given the aging population, these reforms must address the rapid growth of entitlement programs and health care spending.
We also need to revamp the tax code. It is overly complex, out of sync with federal spending, and economically inefficient, providing large but unscrutinized subsidies for some individuals and businesses at the expense of everyone else.
A key problem with the current debt limit mechanism is that Washington’s tax and spending decisions are separate from the financing decisions. Thus Congress ends up arguing about a debt increase that was made inevitable by policy decisions that were made much earlier.
This system encourages irresponsible policy-making as well as endless finger-pointing over the growing gap between federal spending and revenues.
So if a guardrail is needed to help keep Washington out of the fiscal ditch, it should ensure that debt decisions are made at the same time as the tax and spending decisions that will impact the debt.
Another problem with the current system is that the debt limit is an arbitrary number with no economic relevance. A reasonable objective would be to tie the limit to a meaningful economic target, such as a certain debt-to-GDP level.
Finally, the consequences of Washington’s failure to meet a target should be automatic tax and spending changes, a more logical and far less costly result than throwing the federal government into default.
The current debt limit mechanism is more trouble than it is worth.
A revised debt limit should focus Washington’s attention on how the debt is created in the first place, not on whether to harm the nation’s creditworthiness and rattle financial markets around the world.
Robert L. Bixby is executive director of The Concord Coalition, a 25-year-old non-partisan organization that advocates more responsible fiscal policies in Washington.
This article originally appeared in The Hill.