Wednesday, October 09, 2013

Putting the "Limit" in Debt Limit

We are back exactly where we were last year, and the year before that. Once again we are bumping up against the debt limit, and Congress is considering raising or not raising the limit, or looking for what concessions they can get from the other party to get their way. In the end, the debt limit will be raised and business as usual will continue. In the past it has always been raised, and if things go on unchanged, it will continue to always be raised, which means that the nation's debt will continue to mount.

Right now our debt stands at 73% of GDP. On our current trajectory, debt will exceed 100% of GDP within 20 years, and could be 150% of GDP by 2038.

The debt ceiling as it exists now is not functioning to control the rate of growth of debt. As we rack up debt at ever-increasing rates, Congress just has to raise the ceiling more often, or raise it further. It has been suggested that we should simply do away with the debt ceiling, allowing the President to borrow as needed to achieve the spending approved by Congress. The Constitution gives Congress the power to authorize borrowing, and that authority should not be casually handed over to the Executive Branch.

Either way, there is a disconnect between revenue and spending. A responsible fiscal policy must look at the available revenue and set spending priorities to function with the money available. This is how a household or a business functions, and it is how the Federal Government must function as well.

The debt ceiling could be used in a way which would function as a true limit, constraining government spending and creating a link between revenue and spending. Instead of setting a dollar amount, the debt ceiling should vary on a fixed, predetermined schedule based on a percentage of GDP. This schedule should be designed to start out close to our current level of 73% of GDP, but in the coming decades, gradually bend that curve downward. Instead of growing the debt to 150% of GDP by 2038, we should reduce it to 60%. This would still be a larger dollar amount than we have today, but it would back us away from the brink of the debt spiral and financial collapse which we will certainly reach within our lifetime on the current course.

The real debt ceiling comes when interest on the debt outpaces economic growth, causing creditors to demand much higher interest rates, driving up the cost of servicing the debt, and ending our ability to continue spending money without any consideration of how we will pay it back. The choice is ours. We can control spending and debt now in a controlled, gradual way or it will be done for us in a much more painful manner in the not so distant future.

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