Why eliminate the national debt ceiling?
Why should Congress do away with the national debt ceiling?
Congress should eliminate the debt ceiling because the U.S. government should always fulfill its legal financial obligations, even if it has to borrow money to do so. That’s why! The reoccurring political controversies about whether or not to raise the debt ceiling to avoid government shutdowns have nothing to do with whether Congress should increase or decrease government spending in the future. The debt ceiling neither expands nor limits Congress’s ability to spend money in the future. It only limits the government's ability to fulfill the financial obligations that Congress has already made. Congress’s refusal to raise the debt ceiling is like refusing to pay your electric bill or car payment because you’ve already spent all the money you had budgeted for this month.
The debt ceiling was established by Congress in 1917 during World War I. It gave the Treasury Secretary more flexibility in spending funds authorized by Congress. Before World War I, Congress had to authorize the U.S. Treasury to borrow money each time it needed to sell government securities to meet its financial obligations. Amendments were added through 1941 to create the debt ceiling regulations of today. The debt ceiling was intended to let Congress focus on total budget shortfalls without approving every expenditure that increases the deficit. The debt ceiling was never meant to raise questions about whether the government should meet its financial obligations or limit its future spending. It was certainly never meant to be used as leverage in contentious legislative negotiations as it has been in recent years.
The U.S. Constitution makes Congress responsible for all government taxing and spending decisions. If Congress makes government spending commitments that exceed tax revenues, the inevitable result will be budget deficits. Spending that exceeds budgeted levels is a matter of mathematics, not political priorities or preferences. A refusal of Congress to raise the debt ceiling would result in the government defaulting on its debts—a refusal of the U.S. government to fulfill its legal financial obligation.
The real threat of Congress’s repeated default threats is to the integrity of the U.S. economy. The U.S. dollar is not backed by gold, silver, or anything of real or tangible value. The value of the U.S. dollar, regardless of whether dollars are represented by coins, bills, or bank deposits, is backed only by the “full faith and credit of the U.S. government.” A failure of the U.S. government to meet its financial obligations would threaten not only the value of the U.S. dollar but also public confidence and trust in the financial integrity of the U.S. government.
A loss of confidence in the government to pay its debts would increase interest rates, reflecting greater risks of defaults. Higher interest rates on government securities would further increase government obligations. The increased economic uncertainty would result in stock market volatility. Consumers and investors would face higher interest rates, restricting the availability of credit to finance economic growth. The higher interest rates and lower economic growth would further increase the budget deficit. Tax revenues would decline, and debt service expenditures would increase, just the opposite of the stated objective of those who oppose raising the debt ceiling.
Republicans in the House of Representatives have defended limiting the debt ceiling as a means to restrain “out of control” government spending on social programs, specifically Social Security and Medicare. They claim the government is creating an irresponsibly large national debt that will have to be paid off by our children and grandchildren. As explained in my previous post, this is simply not true! Contrary to the propaganda otherwise, the national debt is not like a household or business debt. The national debt is analogous to deposits in a commercial bank. Both are debts in the sense that investors or depositors can withdraw their funds if they choose to do so. There is no more reason to pay off the national debt than to take deposits out of commercial banks.
The only conditions under which commercial banks need to be concerned about the amount of deposits is if there is a “run on the bank” caused by a loss of trust and faith in the integrity of the bank among their customers. The only reason Congress needs to be concerned about the size of the national debt is if there is a lost confidence in the U.S. government. There will be no winners, at least not in the U.S., if there is a run on the “U.S. Treasury” because lenders/depositors have lost trust in the “full faith and credit of the U.S. government.”
If Congress at some point refuses to increase the ceiling on the U.S. debt, it will not be because of any legitimate concerns about the size of the national debt. It will be because Congress refuses to allow the government to fulfill its financial obligations. The default will affect not only its current creditors but also recipients of Social Security, Medicare, Medicaid, and other promised government benefits. A refusal to raise the debt ceiling is a misguided attempt to force a reduction in the size of government without taking responsibility for cutting the programs that would need to be cut to reduce government spending significantly.
There are legitimate differences of opinion regarding how much of our money we need to spend collectively through government programs and how much we prefer to spend individually. There are many legitimate needs and wants that we can only meet collectively. Unless we are multi-billionaires or at least independently wealthy, we can’t build roads and bridges, protect ourselves from criminals, protect our homes from fire, or cover the potential cost of a major medical emergency by ourselves. We can protect ourselves from discrimination or be assured of our right to vote. We also have legitimate individual needs and wants, and we should have a say in how our money is spent, even if we choose to spend it collectively.
The current debt ceiling could be replaced with a formal obligation of the Treasury to inform Congress when it needs to borrow more money than budgeted to meet the government’s financial obligations. The question of whether to eliminate the debt ceiling has nothing to do with political decisions about how much the government should spend, or not spend, in the future. Congress should eliminate the national debt ceiling because we collectively—meaning through government—pay our debts and should fulfill our financial commitments.
John Ikerd
Notes:
https://democrats-budget.house.gov/resources/fact-sheet/debt-ceiling-explainer#:~:text