How to Solve the National Debt Ceiling 'Crisis'

Debt ceiling should cover money U.S. owes outside entities, not money one part of the government owes to another.

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Washington is up in arms over the coming vote to increase the federal debt limit.

Republicans are insisting that any effort to increase the amount of money the federal government is allowed to borrow be accompanied by strict controls on the Obama administration’s ability to spend. Democrats are demanding a clean bill without any strings and are suggesting, darkly, that slowing the process in order to achieve spending reductions will throw the nation’s financial affairs into chaos.

[Read the U.S. News debate: Should Congress increase the debt ceiling?]

These concerns are echoing across the country. Parts of the Tea Party movement are encouraging members of Congress to vote “No” on any bill to increase the debt limit as a matter of principle, regardless of the short-term consequences. President Obama’s allies, meanwhile, are repeating the charge that such ideas are reckless and that any real reforms in spending—as Wisconsin Republican Rep. Paul Ryan outlines in his fiscal year 2012 budget document—will jeopardize the poor, the elderly, the indigent, and those at the bottom of society.

It’s a problem without a solution—or is it?

Writing in the April 20 edition of Investors Business Daily, economists James Carter and Pete Davis suggest that the current construction of the federal debt limit “has no basis in economic reality.”

“The current limit covers more than 99 percent of total federal debt, including publicly held debt and debt held by federal accounts (e.g., the Social Security Trust Funds). The latter is just the authority, but not the means, to pay promised future benefits to ourselves,” Carter and Davis write. “The fiscal burden of providing those benefits is not felt until the benefits are paid. So trust fund debt has no economic impact. It's just a distraction.” [Read the U.S. News Debate: Does the Constitution need a balanced budget amendment?]

If it’s just a distraction, it’s a pretty big one. But Carter and Davis point to a way out of the current crisis, one that allows everyone to come out a winner while keeping the financial markets stable.

“Why not,” they ask, “exclude debt held in federal accounts from the debt limit?”

It’s a good question. As far as the U.S. Constitution is concerned, the important part of the discussion is the “public debt”—meaning what the United States owes to outside entities like the purchasers of U.S. bonds and securities or, to put it another way, the money borrowed against “the full faith and credit” of the United States. It does not mean that which one part of the federal government owes to another. According to Carter and Davis, publicly held U.S. debt is just about $9.7 trillion at the moment, well below the existing ceiling, which is almost $14.3 trillion.

What Congress could choose to do is send legislation to the president that actually cuts—not increases, but cuts—the debt limit by several trillion dollars simply by making clear that the limit only applies to publicly held debt. [See editorial cartoons about the budget and deficit.]

The idea is catching on. There’s already at least one web site—LowertheDebtLimit.com—devoted to the idea, sponsored by Let Freedom Ring!, where I am a senior fellow, and where some members of Congress who are looking for a creative way to get around the anticipated roadblocks have expressed interest in the idea.

Cutting the debt limit is an idea that would appeal both to the Tea Party types and the independents that put the current Congress into office. With the right restrictions, like ways to define and deal with unfunded federal obligations and the strengthening of the rules governing existing federal trust funds, this is one idea that could fly.

  • Check out a roundup of editorial cartoons about the budget and deficit.
  • Read the U.S. News debate: Does the Constitution need a balanced budget amendment?
  • Read the U.S. News debate: Should Congress increase the debt ceiling?
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