But the political process may turn out to be a national disgrace
With the U.S. on the verge of a self-inflicted sovereign debt crisis, political commentators have begun to place blame. One common target is the debt ceiling itself. Many consider it a stupid idea. The Atlantic's own Derek Thompson calls it a "National Disgrace." Why limit the amount that the U.S. can borrow -- doing so only makes borrowing more difficult. Well, isn't that kind of the point?
A Noble, American Concept
In fact, the concept a debt ceiling couldn't be much more American in flavor. The nation was established in the context of limited government and checks and balances. The debt ceiling aims at both of these ends. First, it very literally limits Congress' ability to grow government without implicit taxpayer approval. Although Congress can always just tax more to spend more, taxpayers may eventually object. But to borrow in excess of some established limit, they must raise the ceiling. Doing so forces them to answer to voters.
Second, it creates a sort of internal check: Congress is essentially checking itself. As mentioned, it can certainly continue to raise the ceiling. But as we're learning right now, doing so can sometimes prove to be quite a headache. And it should be.
The ceiling's flexible nature is actually a positive. When unusual, emergency situations hit -- like world wars or financial crises -- Congress has the opportunity to temporarily raise the ceiling. So it's a restraint that isn't so strict that it should choke the nation in a time of duress.
The Real Disgrace: The Political Process
And yet, that's exactly what's happening right now. The argument against the debt ceiling goes something like this: it's crazy that there's a debt ceiling, because it may cause the U.S. to default when there are plenty of investors who are perfectly happy to buy more debt from us. It makes the nation look like it's in as dire straits as other countries that actually cannot borrow more money because their creditworthiness is trashed.
So is the debt ceiling a horrible idea after all? Blaming the debt ceiling for the problems that Washington is experiencing right now is sort of like blaming a gun for murdering someone. The debt ceiling was merely an object through which the real problem manifested itself. The potential poison is not the debt ceiling, but the political process itself.
If the U.S. ends up defaulting later this year, it isn't because a debt ceiling is in place -- it's because Congress couldn't find a way to agree to a plan that would raise the ceiling while ensuring that the unsustainable path of U.S. borrowing eventually comes to an end. The problem is politics, not the law.
And what so many now consider poison may turn out to be an antidote. If the debt ceiling debate does lead to a massive long-term deficit dwarfing agreement, then the debt ceiling did what nothing else has managed to: it may force Republicans and Democrats to agree to spend at a rate close what they obtain in tax revenue. Washington actually moving towards a balanced budget would be a pretty miraculous achievement.
One Possible Reform
The debt ceiling certainly isn't perfect, however. At least one legitimate reform to the debt ceiling could be suggested. Over the past hundred years or so, the debt ceiling has really just moved with U.S. borrowing. In this context, it serves little purpose. It has been raised over a hundred times as a normal course of congressional business. This doesn't say much for the concept of a borrowing limit.
Instead, it should be set at some amount of money that Congress -- or more importantly, the market -- considers borderline dangerous. One possible mark could be to place the ceiling at 100% or some multiple of the three-year rolling average of annual U.S. GDP. This would cause the ceiling to automatically rise as the economy grows.
If that were the case, then the ceiling would have rarely needed to be raised, since U.S. borrowing throughout history was almost always well below 100% of GDP. The exceptions include the Great Depression, World War II, and right now. Of course, Congress could still temporarily raise the debt ceiling in such situations, as warranted.
So we shouldn't take out our frustrations with Washington's divisive politics on the debt ceiling. Forcing Congress to think about the money it's borrowing from time to time is actually a pretty great, all-American idea, especially if that borrowing is getting out of hand. The real problem, which at this time is only potentially a problem, is the political process. If it leads to a self-inflicted U.S. default, then Congress should be ashamed of itself -- and shouldn't be able to blame the debt ceiling for its own failure.
Image Credit: REUTERS/Chip East