Despite the debate raging on in Washington, we know that the U.S. debt ceiling will be raised. It has to be. But what we don't know is whether that increase will include a meaningful plan to cut the long-term deficit. While such a plan doesn't necessarily need to be tied into raising the ceiling, yesterday Moody's came out saying that the two are now inextricably linked, due to the politics involved. But earlier yesterday, a Wall Street Journal op-ed by economist John Taylor argued that linking the two actually makes good sense.
If politicians just increase the debt limit now without simultaneously correcting that rapid spending growth, then they will be expected to do so in the future. In contrast, if they tie any increase in the debt limit to a halt in the explosion of spending, then people will give them better odds that they will control spending in the future. Linking the debt limit vote to spending thus establishes a precedent and valuable credibility.
Another way to see the value of the link is to compare it with the debt-failsafe mechanism that President Obama has proposed. Under the debt-failsafe plan, if spending grows too rapidly in the future (after 2015) relative to forecast, and the debt thereby rises more than budgeted for, then there would be an automatic reduction in spending. In other words, debt increases and spending reductions are linked in the future. But if there is no link in the present, as in a case of a clean debt limit increase, how can people expect one to be followed in the future? How can today's politicians expect future politicians to adhere to such a policy if they can't do so today?
Of course, the limit could just as easily and effectively be linked to raising taxes as to cutting spending. But the point is that Congress shouldn't just be able to raise the debt ceiling ad infinitum without also committing to exercise fiscal restraint in the future.
Read the full article at the Wall Street Journal.