The eleventh-hour budget deal negotiated by Congress and the White House late last month may have ended the specter of a new government shutdown to the benefit and relief of the political establishment, but it didnt resolve Americas debt crisis. It only delays the day of reckoning and, in the long run, will make matters worse, as the current $18.1 trillion debt ceiling is increased still again.
With President Obamas signature on Monday the deal becomes law. But it was a bad deal and bad law.
The political posturing should be familiar to taxpayers by now. Government officials warn that Washington is running out of cash, and that Uncle Sam will begin defaulting on obligations if the debt ceiling isnt raised to allow additional borrowing. Left-leaning commentators suggest that arguing over the debt ceiling is insane, while gun-shy House Republicans offer to raise the ceiling in exchange for spending cuts and a vote on a balanced budget pact. We should know by now: It was all a charade.
In the first place, the federal government is sitting on a stockpile of assets, ranging from buildings to real estate to offshore oil deposits to (if you believe the governments books) gold. During the debt ceiling debate in 2011, I did back-of-the-envelope calculations and identified some $1.6 trillion in liquidassets that the feds could sell to raise cash. So when Treasury Secretary Jack Lew warned that Washington needed to borrow more money to keep the government going, he wasnt exactly being entirely truthful. Washington could have done what many businesses and families do when they face a cash flow problem: They sell assets that that theyre not using.
Many progressives wish to abandon the debt ceiling altogether, arguing that the debt ceiling doesnt let the federal government spend moremoney, it simply allows the government to pay for spending Congress already has ordered.
Although this argument may make sense in the context of an individuals spending decisions, it doesnt work when it comes to the federal government.
Originally, Congress itself would authorize debt issuesthat is, the sale of government bonds. In 1917, however, in the midst of World War I, Treasury officials convinced Congress to let them run their own debt auctions in order to have more flexibility. Congress agreed but placed a limit on the total amount of debt the Treasury could float in this fashionhence the birth of the debt ceiling we know today.
Anyone familiar with history can understand why Congress insisted on the debt ceiling. If the Treasury had the power to issue bonds and raise money without congressional oversight, it would be much more difficult to constrain government spending, regardless of the constitutional directive that Congress should control the purse strings.
This also shows why the debt ceiling is an excellent device for limiting spending. The reason its difficult to cut federal spending is that every program has a constituency that gains directly from the program and will fight to keep it in place, with ever-increasing funding. Arrayed on the opposite side is the general public, which stands to gain very little in the grand scheme of things if Congress reduces funding for a program. Politically, therefore, Congresss incentive is to approve more and more spending.
If Congress also has to vote to raise the Treasurys debt ceiling in order to increase spending we have an additional check on their behavior, a mechanism that at the very least forces legislators to acknowledge the impact of their spending decisions.
This is why Republican deficit hawks who vote to raise the debt ceiling, while insisting that theyd love a balanced budget amendment or other procedural innovation to curb spending, are also bending the truth.
We dont need any more tinkering with the rules: If Republicans would stand firm against further debt ceiling increases Washington would be forced to balance spending and revenue. After all, if youre not allowed to increase your debt, you cant spend more than your income.
As usual, the last-minute deal was hailed by the political establishment as a courageous act of political diplomacy, when what it really was is an act of cowardice that will further burden our children and grandchildren with the bills we refuse to pay ourselves.