The writer is a professor of economics and finance at Columbia University and was chairman of the US Council of Economic Advisers under President George W. Bush
“Hit the ceiling” is to be frustrated enough to be insane. Just last week, Treasury Secretary Janet Yellen informed Congress and the public that the US Treasury, the world’s largest borrower, may not be able to meet all government spending obligations by June 1. , raising the specter of an early Treasury debt default. The culprit is the “debt ceiling”, i.e. the government must periodically increase the amount of eligible debt outstanding, a feature of US fiscal affairs since 1917.
The drama has two sides: the superficial question of whether the debt ceiling will be raised to accommodate loans that reflect spending decisions (whether to pay our bills), and the underlying question of how to alter the nation’s unsustainable fiscal trajectory (whether to agree a framework for sound policy). The Republicans have approved a bill that allows the debt ceiling to be raised, but with difficult conditions that are not acceptable to the Biden administration. The president and Yellen have asked for a “clean” extension without negotiations. A meeting between Biden and House Speaker Kevin McCarthy produced little momentum.
This looming game of chicken produces a range of reactions from “What’s the debt ceiling?” to “They’ve always fixed it, so they’ll do it again” to “This could get ugly.” Well, it might even get ugly, but it doesn’t have to. While the Biden administration is right that a blowout leading to a default would be a disaster, a “no negotiation” stance makes achieving any politic very difficult business. And while House Republicans have passed a debt ceiling bill linked to some sensible spending changes (like returning unspent Covid spending), their inclusion of a range of policies beyond this spending debate makes negotiation difficult.
Bringing long-term debt problems to a head by threatening default is disastrous. The prospect also threatens the cost of credit not only for the federal government but also for US states, businesses and households. Since such an argument carries irresponsible consequences, it is both a bad experiment and a weak negotiating position. That said, we cannot simply continue to raise the debt ceiling without considering the underlying challenges. The nation is on an unsustainable fiscal path, amplifying future pain.
There’s a better way. Understanding the consequences of excessive federal deficits and debt is essential to building consensus for action on spending and taxes. An agreed fiscal framework could give Congress and the president spending, deficit and debt targets. This in turn could foster accountability by giving political actors and the media an opportunity to criticize inaction.
Good advice on how to achieve this comes from unlikely places. For conservatives in Congress, Sweden offers a way forward. In response to its fiscal crisis in the 1990s, Sweden embarked on a medium-term budgetary process beyond the annual budget, with debt targets and a spending ceiling. The Swedish Fiscal Policy Council provides an independent assessment of fiscal sustainability, which is visible to the public and to which the government is accountable.
A decade ago, Tim Kane and I proposed a US spending cap tied to a long-term average of federal revenues (adjusted for inflation), triggering congressional action to cut spending or raise taxes if large deficits persist. Congress could only overturn it with an absolute majority. The precise mechanism is less important than Sweden’s insight that a longer-term fiscal framework and direct accountability are needed. Such a mechanism separates the concerns debt from the question of debt ceiling. Adherence to the fiscal framework allows for future net increases in the debt ceiling as long as the framework is in place. This would be progress from our current deadlock, and adding short-term spending restraint offers a win for McCarthy.
As for the progressives? Good advice here comes from . . . Joe Biden. In the 1970s, then-Senator Biden introduced a bill that would have limited budgetary authority for all federal programs to between four and six years. He also supported reductions in social security benefits as part of the 1983 reforms. The point is not that the focus should be on social security or that any picture is perfect, but that a forward-looking target for spending and the debt with responsibility. Going forward with raising the debt ceiling within a budgetary framework offers a win for Biden.
Consider the alternatives. Flirting with default will cause an immediate and costly drop in stock prices and already weakening confidence economy. (Memo to Congress and the White House: Studying Market Reactions to the Initial Denied Approval of the Troubled Asset Relief Program for Banks at the Onset of the 2008 Financial Crisis). a prescription for useless future pains. As the late economist Herb Stein once said, “If something can’t go on forever, it will stop.”
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