The Debt Limit on the Federal Government was placed into law in 1917 as a check on presidential power, and independent fed and past congressional commitments. Raised some 84 or more times since then, changes to the Debt Limit often involved negotiations between the Congress and the President. Given the myriad of budget authority tools used by Congress and ever more superficial legislation empowering the executive to make contingent liability decisions, the Debt Limit is a final check on long term commitments that pass the majority of one congressional session, but not the majority of long term national interest. With the executive’s ability to issue treasury notes with varying interest rates and duration, void of sufficient congressional control, it is possible to lock in serious liabilities which form a contingent risk to future budgets. The Federal Reserve adds to our capital risk with its independent actions, directly impacting the credit worthiness of the United States.
If the government reduced spending to avoid raising the debt limit, would the economy collapse? No. So why does reducing spending by adhering to a Debt Limit, by reducing spending, cause a collapse? A failure to raise the Debt Limit will not cause a default on interest payments. There is more than enough tax revenue to service the national debt. The government would default so to speak on various commitments like SNAP, welfare, defense, etc. By the same token, they would do that if spending is reduced. Fears of the economy collapsing and markets tanking do not make a lot of sense because the government still spends a lot of money and would not default on interest payments. Failure to raise the debt ceiling will slow QE’s ability to artificially juice the stock market. My guess is most economists worried about failure to raise the Debt Limit are really worried about unwinding QE. So, we are fighting over a Debt Ceiling so that wall street can continue to build the next bubble? Superficially, failure to raise the Debt Ceiling may cause a lack of confidence in the United States, which is why it makes more sense for the President and the Congress to negotiate its pound of flesh to a reasonable conclusion as has been done 84 times in the past.
The Debt Limit, in its original definition and continued through subsequent application, creates a moment of pause to realign commitments to meet present day concerns rather than persist budgetary obligations made 30+ years prior. History shows the Congress and the President almost always negotiate the debt ceiling, rarely as friends and always to settle unrelated issues. The President and the media are relying on our ignorance of history to make the Congress look bad and sell news, so at least update yourself on the history of the Debt Limit:
- Congress and the Politics of Statutory Debt Limitation
- In Defense of the Debt Limit Statute
- The Public Debt Limit
- Obama’s claim that non-budget items have ‘never’ been attached to the debt ceiling
- A Debt Limit History for the President
The media, blogosphere, and twitter land is all excited about “The Debt limit doesn’t impact national debt” so Congress should back down. This is a fairly superficial position. The President and Congress both know (we should be more worried if they don’t) the debt limit is a political check and balance on the executive branch. The President is trying to stretch that control as much as he can by threatening how a reckless Congress will destroy the economy. In the end, the President needs to accept some level of spending containment and the limit will get modified.
PS: One key point to those that say “Congress has Authorized all these Expenditures and now needs to pay for them”. Debt is the net of revenue – expenditures, so its not just about spending. Obamacare, a tax, did not originate in the House, as all revenue bills are required by the Constitution. So in fact, it can be argued, Obamacare did not receive the intended review of the peoples house and therefore did not go through the meat grinder of our political process to achieve national consensus. This impacts the revenue side of the equation (shortfall), hence driving up debt. This is one of many examples of commitments from the legislature that upon reflection should be corrected by a present congress to address current capital structure realities. Sounds like a good reason to have a Debt Limit as a check and balance.
