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Why the U.S. Debt Ceiling Is Dangerous

Sunday January 22nd, 2012   •   Posted by Emily Skarbek at 10:43am PST   •  

My colleague Jeff Hummel pointed out an interesting blog post by Ted Levy where he asks the question: what’s the point of the debt ceiling? Levy shows that since the debt ceiling was created in 1917, it has been raised over 100 times, 8 times in just the last ten years. In fact, Congress has always voted to increase the debt ceiling. Every time. Congress has never enforced the debt ceiling and made it a binding constraint on politicians propensity to spend. So Levy asks, what’s the point?

Is the point that a debt ceiling shows the world we’re not profligate, that we won’t take on more debt than we can afford? How can it possibly fulfill this function if it is never not raised whenever we approach it?

Is the point that having a debt ceiling creates incentives for spending restraint? But government growth has been MUCH larger from 1917-2011 than it was from 1787-1917. From the pre-Civil War period to just before WWI, government grew from 1.5% of GDP to 5%. From WWI to Obama, government has grown from 5% of GDP to 25%. So the debt ceiling is clearly unsuccessful in creating incentives for spending restraint.

Alan Greenspan, former head of the Federal Reserve, commented on Meet the Press in late spring, 2011, that he saw no reason to have a debt ceiling. Greenspan certainly didn’t mean he saw no reason for spending restraint. He merely meant this repeated political theatre, this habitual kabuki dance, this routine wringing of hands and gnashing of teeth, this recurring financial brinksmanship, serves no purpose. With or without a debt ceiling, those who buy our bonds will judge for themselves whether or not we can pay it back. That, not an arbitrary and continually increasing ceiling, is what is important in the end.

I agree with Levy, the debt ceiling is a tool for political theater. Bond markets serve to price government’s credit-worthiness, not political dictates. But I will take the argument a step further. Having an arbitrary and non-binding rule is not only useless for fiscal restraint, it’s harmful. The general public views the debt ceiling as a mechanism for limiting Congressional spending. And while theory and history point out that this is not the case, having rules that people think create real limits on political power—that are in fact not effective—undermine the credibility of binding constraints.

Believing that the debt ceiling places limits on federal spending creates a false notion that we have an effective mechanism to limit Congress. These false notions of limited power lead people to overestimate the control they have over their own government and underestimate the necessity of real limits on political power.

The situation in Congress is what James M. Buchanan would refer to as “the fox guarding the hen house.” The debt ceiling is impotent against pressures for fiscal spending—it does nothing to keep the hens safe from the hungry fox. True, if the debt ceiling isn’t serving as an effective fence, it is pointless to have it in place. But the situation becomes even more dangerous when the American public think they are protected from the fox.

Levy says that when federal spending pushes up against the ceiling once more, the debate should not be on whether to raise the debt ceiling. The debate should center on whether or not to repeal the debt ceiling. I agree—repeal false constraints. But do so not only because the debt ceiling is impotent but because the illusion of restraint is itself dangerous.

Featured Image:
© Mary Lane |

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January 2012