Why I Love the Debt Ceiling

Whenever the debt ceiling creeps back into the news, Smart People start talking about how ridiculous the whole thing is and why it should be completely abolished. Congress already approved the legislation that led to increasing the debt, so why should they get a chance to play dangerous political games around actually allowing it to be increased? As Bill Clinton says, “The idea that the Congress gets to vote twice on whether to pay for [expenditures] it has appropriated is crazy.”

It may be a crazy idea, but I also think it’s an awesome and insanely useful idea. Yes, in theory, it’s a redundant step, but the actual practice is far from the theory – a point Smart People should recognize, as many of them like to make the same criticism of libertarian theories. In practice, the debt ceiling gives Congress a chance to rethink the policies it already approved that led to this debt.

That point has been made more eloquently by others, but I feel like a lot of people don’t appreciate just how powerful of a trick the debt ceiling can be, if you’re concerned about deficit reduction. You might not understand this if you’ve never been in a financial position where you had to trick yourself in order to save money or cut your own spending.

People in this position may decide to wait 24 hours before purchasing something that is over a set limit. They may decide to take out a limited amount of cash for certain types of purchases, and only use cash for those purchases, to prevent themselves from spending a greater amount. If they run out of cash, there are no external forces preventing them from going to the bank or an ATM to get more, but that deliberately-placed hurdle may give them the marginal incentive to avoid crossing it or to commit to changing personal spending policies to avoid crossing it again in the future.

The basic idea is that people are naturally inconsistent. Someone may want to save money without wanting to reduce his spending or increase his income. In some ways, he could be described as a hypocrite, but if he decides that his desire to save money is most important, he can take steps to encourage or force himself to reduce his spending.

If individuals are inconsistent, then the aggregate American people – and the Congress that represents them – most certainly are. There is no greater example of a body that wants to save money without reducing spending or increasing income! So what greater use could there be for a trick that forces this body to confront its own hypocrisy?

Furthermore, the debt ceiling doesn’t quite equate to a “second” vote anyway. Yes, Congress already approved the legislation that got us here, but we all know that programs can end up costing far more than originally estimated. The debt ceiling helps account for that, too.

I know, I know, Keynesians claim there’s no need to reduce spending and that hitting the debt ceiling would be catastrophic. I can appreciate a Pascallian uncertainty argument that it’s not worth the chance, but I am unconvinced it would be disastrous. After all, these folks have been warning of disastrous consequences for awhile now.

Last year’s debt ceiling battle was supposed to hurt the economy and make investors more nervous about our bonds. I don’t think there’s any evidence that it hurt the economy, and Treasury rates have only gone further down. This year, Fiscalcliffmongerers warned of further damage from the uncertainty – well, there’s still no deal but the sky hasn’t fallen in yet and Americans still spent billions on Christmas. I’m starting to become as skeptical of the alarming Keynesians on my (far) left as I am of the hyper-inflationary Austrians on my (near) right.

I don’t expect the debt ceiling to not actually be raised, anyway. Any spending cuts that can be extracted for it is just icing on the cake. Last year’s debacle actually almost kinda sorta might lead to a real net reduction in spending of a few measly billion dollars from last year to this year!

In Milton Friedman’s preface to Capitalism and Freedom, he talks about the “tyranny of the status quo” and how “only a crisis…produces real change.” I am coming to believe that as bickering politicians continue to seem unable to make small, efficient changes to the budget. Maybe, just maybe, a tool like the debt ceiling will trick them into submission. Or maybe not. But for now, I can hope.

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7 Responses to Why I Love the Debt Ceiling

  1. RossB says:

    The problem is that it doesn’t work. Or, at least, it doesn’t work like it is supposed to. The idea behind a debt ceiling is that it will curtail our spending. It doesn’t. In the buildup to the Iraq war, there was very little talk about the financial cost of the war. I personally mentioned it as the main reason I was opposed to the buildup. Saddam Hussein is an evil man who deserves to be deposed, but doing so and repairing the country afterwards was expected to be extremely expensive. Unfortunately I was right. If the purpose of the action was to make us safe, or to increase the general condition of the world, then you could spend a lot less money on foreign aid and achieve a lot more. This is “Ike style”, biggest bang for the buck approach. It is why Obama managed to help overthrow Gaddafi while spending a very small amount of money (compared to Iraq). Of course, this resulted in problems in Mali, but that is another story.

    Part of the problem is that there is a lag period. The last time we had a (year to year) surplus was when a Clinton was in office. What happened since then? The Iraq war, the Afghanistan war, big tax cuts and a major recession. The debt ceiling was increased without thought for those years because there was nothing to be gained politically from it. No one stood up and said “Wait a second, we should be paying down the debt right now, since the economy is relatively strong. As a matter of fact, if we make a good faith effort to pay down our debt, the Fed will respond by lowering interest rates and the economy may get even better”. No one said this because the (Republican) party leaders didn’t stand to gain (politically) from saying this.

    Now, of course, things are different. The Iraq war is over and the Afganistan war is winding down. Unfortunately, we still have to pay for the medical care of all of the veterans, as well as other deferred costs. So any cuts now will involve either cuts to veteran coverage (which is immoral in my book) or cuts elsewhere. The original causes of the debt go ignored. It is pretty easy to conclude that the debt ceiling is merely a political device, and it is wielded only when one party decides that it behooves them to wield it.

    A more logical approach would be to require a special vote when the policies enacted are likely to increase the deficit by a certain percentage (say, 20%). Wars would not be exempt. Thus a resolution to go into Iraq would require an estimation of the costs as well as approval of those costs.

    Oh, and I’m a Keynesian just like most engineers are Newtonians, and for the same reason: It works. The time to reduce spending and increase taxes is when the economy is strong, and inflation is a concern. The Fed can’t lower rates right now because they are already at zero. Reducing spending or increasing taxes will simply increase unemployment. This is standard economic theory. We should definitely lower our debt, its just that we should lower it later, when the economy has recovered. It is difficult to find many economists who feel otherwise, although I’m sure they are out there (just as you can find scientists who don’t believe in evolution).

    • Joshua Hedlund says:

      Thank you for your thoughts. I agree that political incentives have created the problems we find today, but I don’t think your solutions would be any more exempt from the same politics. It would be great to require a special vote on expensive projects, but how do we know we are going to have reliable estimates? How do we guarantee that our government would follow them? In fact, haven’t we already had something of a similar mindset in place – “PAYGO” – that the government generally figures out how to ignore anyway? And if a genuinely enforceable special vote rule could be devised, what political incentive would our politicians have to enact it?

      I have similar thoughts about Keynesian policies. Yes, I’m skeptical that stimulus spending is effective, both regarding the risks of misallocation in the short-term and the risks of moral hazard and other disincentives in the long-term. But even if increased spending and lower taxes is reliably effective in a recession – and I can understand the arguments that it is – it looks to me like the political reality is that we never get the flip side in a strong economy. When we had the Clinton surpluses and a strong economy, nobody wanted to cut spending; after all, no politician has the incentive to cut spending when it looks like there’s plenty of money to spend on things voters demand. Of course, this only lays a foundation for higher spending that’s harder to cut back from when the money’s no longer there.

      Like it or not, in our political reality the debt ceiling seems to be the only enforcement mechanism we have at the moment. I would even argue that it actually is “working” to some extent – most of this whole “cliff” stuff is a direct result of politicians using the debt ceiling to try to exact changes in policy to reduce the deficit, from Democrats like Conrad in Obama’s initial years to the Tea Party in Obama’s more recent years. I agree you can find plenty of economists who say we should wait to lower our debt until the economy recovers; I just don’t think you can find enough politicians who have the incentives or the integrity to actually do that. As such, I’m hopeful that if the debt ceiling forces policy changes that lower deficits now, then even though it may hurt the economy in the short-term, it would do more to stabilize us in the long-term (even the CBO estimates we would have a stronger economy in a decade if we just went over the cliff) than anything else that seems likely to actually happen.

  2. Pingback: The Debt Ceiling: What’s the big deal? « Rhymes With Cars & Girls

  3. tangentstyle says:

    I’d like to make a comparison to California its referendums. One commonly cited reason for the state’s ‘consistent bankruptcy’ is the fact that the voting body passes referendums without regard to the fiscal reality of them. These motions have to be honored, compounding an already liberal spending policy and (somewhat blatant) mismanagement. I think the point you make here, that a second chance to look at and especially see one’s hypocrisies would come in handy there.

    On the other hand, is it so much to ask that our representatives consider the financial repercussions the 1st time? (Maybe…)

    Also, with regard to the constant disaster prognosticating, I would say that it is difficult to draw conclusions about the effects of debt ceiling, because financial markets are complicated (http://tangentstyle.blogspot.com/2012/08/how-quickly-time-passes.html). Treasury rates are low because Fed keeps policy at 0% and money has been flowing into safe assets. That doesn’t mean that people trust the fiat of the US government any more; it could be that they trust everything else a degree less.

    • Joshua Hedlund says:

      California makes for an interesting comparison. Yes, it would be nice if our representatives would consider the financial repercussions the first time, but they have no incentive to do so when present voters will reward them for handing the bill to future voters. I think any proposal to make governments more fiscally responsible needs to take that political reality into account, which is why a debt ceiling or other “second chance” mechanism may be the best we can do.

      Secondly, I agree that financial markets are certainly complicated. I definitely think there’s an element of investors trusting everything else a degree less (what some refer to as the US being the “tallest midget”). The complication makes me wary of anyone who is confident that they have it completely figured out, especially when time proves their predictions wrong… but at the same it doesn’t mean one of them couldn’t be right, either!

  4. Pingback: If Tim Geithner believes Smart People he should just ignore the debt-ceiling « Rhymes With Cars & Girls

  5. Pingback: ‘Holding the country hostage’ at times is an intrinsic part of having a meaningful debt ceiling | Rhymes With Cars & Girls

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