Debt ceiling is phony, should be abandoned

 

Gordon L. Weil

The U.S.A. is the greatest country in the world. 

The “debt ceiling” is boring.

But those often misunderstood words represent a prime reason for America’s standing as a dominant power with a strong economy.  They assure all that America pays its bills. Yet congressional politics get in the way of setting that limit.

The debt ceiling is the maximum amount of federal government borrowing allowed at any time.    It covers all money the government owes, including the funds owed by one government agency to another.  It does not approve or allow new federal spending.  Funds from borrowing are added to tax revenues to pay for spending Congress has already approved. 

Congress originally authorized each federal government bond.  When that job grew burdensome, it substituted a cap on total debt, leaving the Treasury to issue each bond.  For a while, Congress decided that each spending decision would automatically raise the debt ceiling.  That made sense, but the politicians could not accept losing the vote on debt as a political tool.

Now, one party can use its agreement to a debt ceiling increase to pry concessions on spending from the other side.  Like so much else in Washington, an historic government practice has been converted into a partisan weapon.  Budget politics ignores the shared responsibility of both parties for the spending that ends up requiring the increase.

Playing political games with the debt ceiling is like playing with fire.  And you’re surrounded by deadly explosives. 

If the debt ceiling is not increased, the Treasury won’t be able to pay current costs.  After using every dollar it can scrape up, it must stop or slow some regular government outlays.  Social Security, federal employee and military pay, and emergency response aid could be affected.

A lot of what people receive directly or indirectly from the federal government would be cut back or slowed down.  The effect on the national economy could be huge.  If we worry now about a recession, a sharp reduction in federal spending might guarantee it.

But the effect would be far worse than that.  The U.S. role as the leading global power reflects the role of the dollar as the world’s reserve currency.  That means most of the world regards the U.S. dollar as the most reliable and secure currency.  The dollar is backed by the American economy and the U.S. has never defaulted, always paying its debts.

The dollar is so solid that 65 countries tie their currencies to it and 11 other countries use it as their official currency.  When countries or companies make deals, they frequently use the dollar rather than their own currencies.  The dollar is reliable and does not lose its value.

In the competition and conflict among the world’s great powers, the U.S. has two dominant strengths.  It has the largest, best equipped armed forces spread around the globe.  And it has the dollar.

Compare the U.S. with China.  With more than four times the population, China could displace the U.S, as the top economy in the world.  It is rapidly building up its military, trying to achieve equality with the U.S.  And it wants its currency – the renminbi – to become an alternate world reserve currency to the dollar, enabling it to extend its power across the world.

Historically, the U.S. has not been a typical colonial power with vast overseas territory.  It has projected its power by the outreach of its economy and the strength of the dollar.  As the world’s reserve currency, it is freely convertible with most other currencies.  That’s not true for the renminbi, suggesting that keeping the dollar strong is as important as keeping the military strong.

But threatening the strength of the dollar by raising questions about the willingness and ability of the American government to pay its bills weakens U.S. influence and power.

Republicans could use their House control next year to block an increase in the debt ceiling unless federal spending is reduced.  Lower outlays would leave money to pay outstanding debt.   In the waning days of the current Congress, Democrats are trying for an increase in the ceiling that will last well into the future.

If President Biden resists the GOP, the federal government could be forced to at least a partial shutdown.  In 1995, the last time that happened, the Republicans got the blame.  Would they now risk being assigned the responsibility for a shutdown that could bring a recession?  Even worse, would they give a boost to Chinese ambitions?

The debt ceiling is meaningless, because it merely allows for debt already approved by Congress.  It could either be abolished outright as being useless or raised automatically with spending bills, as was formerly the case, eliminating the need for a separate vote.  Either way, Congress should stop playing with fire.