Chad Stone is chief economist at the Center on Budget and Policy Priorities.
Policymakers who want to improve the country's economic and budget outlook should scrap the debt limit (also known as the debt ceiling), which plays no role in enforcing budget discipline. Rather, in today's dysfunctional political environment, it encourages reckless brinksmanship that makes it harder to work out the compromises necessary to achieve a sustainable deficit-reduction deal.
The Congressional Budget Office makes no bones about the debt limit's irrelevance in this report:
By itself, setting a limit on the debt is an ineffective means of controlling deficits because the decisions that necessitate borrowing are made through other legislative actions. By the time an increase in the debt ceiling comes up for approval, it is too late to avoid paying the government's pending bills without incurring serious negative consequences.
The Congressional Budget Office did go on to say, "However, because increases in the debt limit have been essential, the process of considering such increases tends to bring debt levels to the forefront of policy debate." That was in 2010. But does anyone seriously believe that "debt levels" were not already at the forefront of policy debate by then or that last year's debt limit circus moved us closer to an agreement on policies to stabilize future deficits and debt? Must we go down that road again?
In fact, serious budget analysts attach no economic or financial significance to the debt subject to limit or to the level at which the limit is set. By far, a better measure for policymakers is "debt held by the public" relative to the size of the economy—the debt-to-GDP ratio.
Debt held by the public—basically the sum of all past deficits minus surpluses—tells us what the federal government owes to outside lenders such as corporations, households, and other governments here and abroad. Changes in government borrowing from the public are significant because they can affect national saving and credit markets.
The debt limit applies to a different measure, which in addition to debt held by the public includes money that the federal government owes to itself—such as the money the Social Security and Medicare trust funds have lent to the Treasury in years when their revenues exceeded their spending for benefits and other costs. Debt subject to limit is a close cousin of "gross debt" (the debt shown in those scary debt clocks). These are seriously flawed and analytically meaningless measures of the debt.
Between 1998 and 2001, for example, debt subject to limit continued to grow—even though the country was running budget surpluses and retiring some of the debt held by the public—because the Social Security trust fund was running large surpluses and lending them to the Treasury. The Social Security and Medicare trust funds are projected to grow over the next decade, and their expanded holdings of Treasury securities will add to the debt subject to limit. As a result, debt subject to limit would increase over the next decade even if policymakers enacted a fiscally responsible deficit-reduction plan, but worrying about it would be a useless distraction.
Politicians who were ignorant enough to believe or cynical enough to pretend that preventing a debt ceiling increase had anything to do with controlling spending or lowering deficits produced last year's debt ceiling debacle. That's why budget guru Stan Collender has recently stressed how irresponsible it is to threaten to do it again. Anyone who thought last year that a debt ceiling fight could catalyze a responsible budget compromise should heed the proverb, "Fool me once, shame on you; fool me twice, shame on me."