Chad Stone is chief economist at the Center on Budget and Policy Priorities.
Debt-ceiling silly season has returned. The Treasury reached the current legal limit on its borrowing authority last month and has "begun employing its well-established toolbox of so-called extraordinary measures to allow continued borrowing for a limited time," as this new report from the Congressional Budget Office outlines. Those measures will postpone the next dangerous political showdown on raising the debt ceiling only until late fall. This is all so unnecessary.
To my knowledge, only one other developed country, Denmark, has a statutory debt limit anything like ours. Governments issue debt when the cash coming in from tax collections is insufficient to cover the bills coming due from government spending. Both the United States and Denmark have put a dollar limit on how much debt the government can issue. If the limit is about to be breached, policymakers must enact a law to raise it. Otherwise, the government can't pay its bills when they come due, triggering a default.
There's a crucial difference, however, between our debt limit and Denmark's: the Danes do not play politics with theirs, as Jacob Funk Kirkegaard of the Peterson Institute for International Economics explains:
The Danish fixed nominal debt limit – legislatively outside the annual budget process – was created solely in response to an administrative reorganization among the institutions of government in Denmark and the requirements of the Danish Constitution. It was never intended to play any role in day-to-day politics.
When the financial crisis caused a sharp increase in government debt in 2008-2009, the Danes raised their debt ceiling – a lot. The 2010 increase doubled the existing ceiling, which was already well above the actual debt, to nearly three times the debt at the time. As Kirkegaard reports, "The explicit intent of this move – supported incidentally by all the major parties in the Danish parliament – was to ensure that the Danish debt ceiling remained far in excess of outstanding debt and would never play a role in day-to-day politics."
Not here. Before the 2010 congressional election, the periodic need to raise the debt ceiling gave policymakers an opportunity for political posturing – but nothing like the dangerous brinksmanship we've seen since. When policymakers are at loggerheads as they are now, brinksmanship over must-pass legislation like a debt limit increase won't likely produce sound budget decisions.
Sequestration is the current case in point. The 2011 Budget Control Act, enacted to resolve the debt-ceiling crisis of that year, established a congressional Joint Select Committee on Deficit Reduction (the "supercommittee") to propose legislation that would reduce deficits by $1.2 trillion over 10 years. Sequestration was supposedly the unpalatable backup procedure to ensure that such deficit savings would come to pass even if the supercommittee failed to reach agreement.
But the supercommittee failed, the president and Congress have not enacted an alternative plan to achieve the savings, and, lo and behold, we now face the unpalatable consequences of automatic across-the-board spending cuts.
Republicans have not decided what their demands will be – in exchange for providing the needed votes – when the Treasury runs out of extraordinary measures and the president and Congress must again raise the debt ceiling to prevent a first-ever U.S. default. That doesn't mean, however, that we haven't seen some pretty bad ideas already.
Last month, for example, the House passed legislation that would supposedly "prevent" default in the event of a prolonged standoff by paying bondholders and Social Security recipients first. As my Center on Budget and Policy Priorities colleague Kathy Ruffing wrote at the time, such "debt prioritization" is just default by another name:
Lawmakers shouldn't fool themselves: simply putting bondholders at the front of the queue won't avert financial chaos or soothe creditors. One rating agency explicitly warned in January that honoring interest and principal payments but delaying payment on other obligations [for, say, Medicare or border security] would trigger a review and hence a possible downgrade.
As I've discussed here before, the debt ceiling is simultaneously a meaningless anachronism and a dangerous political football. It's best to scrap it entirely, but the Danes have the second best idea.