The absurdist political theater surrounding the U.S. government debt ceiling is having another revival. With debt default looming next month, President Donald Trump has agreed to a deal that will grant emergency relief for Hurricane Harvey and raise the ceiling — until December, when another phony fiscal crisis is scheduled.
Given the impressive dysfunction of Congress, compounded these days by an unusually incompetent White House, there’s something to be said for institutional strictures that make it harder for government borrowing to get dangerously high. The debt ceiling is meant to do that. Unfortunately, it doesn’t work.
The U.S. has yet to address the long-acknowledged fiscal problem posed by its aging population — and the latest debt-ceiling squabble has failed, like many times before, to put that issue on Congress’s agenda. Instead it has served as a lever for short-term political bargaining.
The main problem is that the penalty it would impose — a default that would worsen the fiscal problem by raising interest rates and destabilizing global financial markets — is too ridiculous to be credible. Everybody assumes that a way around this doomsday scenario will be found by attaching some urgent and popular piece of other business to the necessary legislation (a role currently being played by the Hurricane Harvey provision).
None of this means that the ceiling is harmless. Not only does it fail to solve the fiscal problem, but it also creates needless uncertainty and inflicts costs on U.S. taxpayers. Previous debt-ceiling anxieties came to nothing, but they still pushed up interest rates and in 2011 succeeded in getting U.S. government debt downgraded.
The mere risk of default, be it ever so slight, is a tax on American businesses and households. No fiscal conservative should support this approach.
If Congress cannot renounce this ritual altogether, it should at least make it more productive. It should set the ceiling not in nominal dollars of gross debt (including debt the government owes itself) but in net debt as a proportion of national income. That’s the right way to measure fiscal stress. The ceiling should be forward-looking — based on Congressional Budget Office forecasts — and should come down over time, to encourage gradual fiscal consolidation. Most important, when the ceiling triggers action, it should require a 50-50 mixture of automatic spending cuts and tax increases (equally painful for Republicans and Democrats), not an instant cessation of government borrowing.
Build frictions into the system if you must, Congress. But link them to the threat of corrective action, not of default.