The writer is a professor of economics and finance at Columbia University and former chairman of the Council of Economic Advisers under President George W. Bush
“Hitting the Ceiling” is depressed to the point of madness. Just last week, Treasury Secretary Janet Yellen told Congress and the public that the U.S. Treasury, the world’s largest borrower, may not be able to meet all of the government’s spending obligations by June 1, sparking fears of a first-ever U.S. Treasury default. The culprit is the “debt ceiling” — the amount of debt the government must periodically raise its allowable outstanding debt — a feature of U.S. fiscal affairs since 1917.
There are two parts to this drama – the superficial question of whether the debt ceiling will be raised to accommodate borrowing that reflects spending decisions (whether to pay our bills) and the fundamental question of how to change the country’s unsustainable fiscal trajectory (whether it is within the framework of sound policy ). Republicans passed a bill allowing the debt ceiling to be raised, but the conditions were too harsh for the Biden administration. The president and Yellen called for a “clean” extension without negotiations. The meeting between Biden and House Speaker Kevin McCarthy produced little momentum.
This looming chicken game has generated a range of reactions, from “what’s the debt ceiling?” to “they’ve always solved it, so they’ll solve it again” to “this might get ugly.” Well, it’s likely to get ugly, but it doesn’t have to be. While the Biden administration rightly believes that an outbreak leading to a default would be a catastrophe, the “no-negotiation” stance makes any political deal very difficult. While House Republicans passed a debt ceiling bill tied to some sensible spending changes (such as returning unspent Covid spending), they included a range of policies outside of this spending debate, making negotiations difficult .
Provoking long-term debt problems by threatening default is disastrous. Even the prospect threatens the cost of credit not just to the federal government, but to U.S. states, businesses and households. Because of the irresponsible consequences of such an argument, it is both a poor experiment and a weak negotiating position. That said, we cannot continue to raise the debt ceiling without considering the underlying challenges. The country is on an unsustainable fiscal path, magnifying the pain ahead.
There is a better way. Understanding the consequences of excessive federal deficits and debt is critical to developing consensus on spending and tax actions. An agreed fiscal framework provides spending, deficit and debt targets for Congress and the president. This in turn promotes accountability by giving political actors and the media an opportunity to criticize inaction.
Good advice on how to make this happen comes from unlikely places. For conservatives in Congress, Sweden offers a way forward. In response to its own fiscal crisis in the 1990s, Sweden embarked on a medium-term budget process that went beyond the annual budget—setting debt targets and spending ceilings. The Swedish Fiscal Policy Council conducts an independent assessment of fiscal sustainability, which is made available to the public, and the government must respond to it.
A decade ago, Tim Kaine and I proposed tying America’s spending limit to the long-run average of federal revenue (adjusted for inflation), triggering Congressional action to reduce spending or raise taxes if large deficits persisted. Congress can only overturn it with an absolute majority. The exact mechanism is less important than Sweden’s intuition that a longer-term fiscal framework and direct accountability is needed.Such a mechanism separates the debt from the question debt ceiling. Adherence to the budgetary framework could drastically increase the debt ceiling in the future, as long as the framework is in place. This would be a step up from our current impasse, and increasing near-term spending limits would give McCarthy a win.
As for progressives? Here’s where good advice comes from. . . Joe Biden. In the 1970s, then-Senator Joe Biden introduced a bill that would limit budget authority for all federal programs to between four and six years. He also supported cuts to Social Security benefits under the 1983 reforms. The point is not that Social Security should be on or that any framework is perfect, but that a forward-looking spending and debt target with accountability is important. Raising the debt ceiling within the budget frame wins for Biden.
Consider alternatives. A default would prompt an immediate and costly drop in stock prices and engender confidence in an already weak economy. (Memorandum to Congress and the White House: Examining Market Responses to the Initial Failure to Approve Troubled Asset Relief Programs for Banks at the Eruption of the 2008 Financial Crisis.) Simply acquiescing to raising the debt ceiling without a framework for fiscal sustainability is setting the stage for future failures. Prescribed for necessary pain. As the late economist Herb Stein once quipped, “If something can’t go on forever, it stops.”