Economics & Trade Policy

Published on November 22nd, 2015 | by Danny Khalil

Why the Debt Ceiling is Bad Fiscal Policy

Imagine a federal policy so redundant, so archaic, and so inefficient that it fails to accomplish and even obstructs its intended objective. Now, not only is this policy an inhibition to proper governance, it frequently serves as a stage for theatrical performances from hardline politicians while threatening the historically rock solid foundation of American fiscal policy. Have you guessed it yet?

When most Americans hear the term “debt ceiling”, images of crushing financial obligations and bloated government come to mind. After all, aren’t we already trillions of dollars in debt? Why should we take on even more?

Survey after survey finds that both Democrats and Republicans are largely skeptical of periodic attempts to increase the nation’s limit on public debt. In fact, a recent AP-GfK poll found that Democratic respondents were not significantly more likely than Republicans to foresee a major economic crisis if lawmakers failed to raise the ceiling. That same poll indicated that half thought it should only be raised if doing so was tied to cuts in spending, while a full 11% asserted that it should not be lifted under any circumstance.

The public at large appears to be unaware of just how catastrophic it would be if the federal government simply decided to stop paying its bills — a view echoed by an overwhelming majority of respected economists. Markets would take a nosedive, interest rates would skyrocket, and faith in American financial leadership would deteriorate.

In spite of all this, Americans remain in the dark about how devastating such a situation really would be for the United States and the world as whole, with misinformation pervading every facet our public discourse on the subject. Indeed, a number of surveys have shown that many Americans believe that raising the debt ceiling directly increases the national debt as opposed to allowing the federal government to pay off what it has already amassed.

To be fair, sovereign debt is a tricky subject, and economists frequently spar over just how much debt is appropriate for an industrialized, developed country such as the United States. Yet most seem to agree that the ceiling, as an arbitrary means for constraining debt that has already been incurred, creates needless uncertainty and threatens our national fiscal integrity.

Moody’s has stated that the ceiling creates “periodic uncertainty” for potential investors, raising interest rates and ultimately proving the debt limit to be ineffective at constraining federal spending. The Government Accountability Office has called for its removal and possible replacement with an alternative policy tool that would help foster constructive debates about the nation’s debt rather than political brinksmanship.

As delineated in Article I of the Constitution, Congress controls the power of the purse. In an attempt to streamline the appropriations process, it established what would become the debt ceiling as part of the Second Liberty Bond Act of 1917. Rather than approving the use of each specific debt instrument that could be issued by the Treasury, the ceiling made the process more efficient by setting an aggregate limit on the total amount of debt that could be issued to finance the government’s activities during World War I. Nowadays, however, the debt ceiling has turned into an impediment as opposed to a catalyst to proper governance, becoming a fiscal redundancy ever since the Nixon years when Congress began specifying just how much the government can borrow in its comprehensive budget resolutions.

Instead of playing a game of chicken with the country’s finances, lawmakers should abolish the debt ceiling altogether. No other country in the developed world has such a mechanism, save for Denmark, where it has never been used as a political tool to further cuts in government spending. If the self-proclaimed fiscal hawks in this country are so intent on drastically cutting the size of government, they should raise their proposals through the appropriations process rather than hijack the full faith and credit of the United States to score shortsighted political points.

Edited by: Nicole Fillion


About the Author

Danny Khalil

is a 2nd year Master of Public Affairs student at the Lyndon B. Johnson School of Public Affairs, where he specializes in the study of social and economic policy. He graduated from the University of Texas at San Antonio with his Bachelor of Arts in Political Science and Anthropology in 2014.



One Response to Why the Debt Ceiling is Bad Fiscal Policy

  1. Griffin says:

    A fine choice of topic in this article, however some key details seem to be missing. The debt ceiling’s existence is tied closely with the Federal Reserve, which you do not mention at all. Due to the nature of our fiat monetary system, it is fundamentally impossible to pay off all the debt because of the interest created on every dollar printed – there is more debt than there is currency in existence to pay it. Hence, not understanding this, the attempts by Congress to halt the increase of debt and “balance the budget” is deflationary.

    This begs the question – why is it necessary to continuously go ever deeper into debt in order to finance our government? The answer is it is not necessary, it is a direct consequence of the Federal Reserve central banking system – something many of our previous great presidents fought hard to prevent from ever existing in America. This system profits bankers and politicians at the people’s expense, creating increasing poverty for our citizens. The founding fathers warned about this very thing and took steps to outlaw it, which have since been overturned.

    Simply put, a private central bank is not the only way our monetary system can function. To finance the civil war, Lincoln used a currency called the Greenback – which unlike the Dollar did not create an ever escalating interest debt. Much of our fiscal problems today are because the Dollar is simply not sound money. It is a currency with eroding value, that is today being propped up only by its relative value in trade, because Japan and the EU have the same fiat systems doing the same money printing. If you want to see the real cause of our increasingly dramatic inequality, look no further than this issue.

    Fundamentally – while credit is an extremely potent force to foment economic growth – the act of printing money from nothing does not create real world value. It produces nothing tangible. Thus the attempts by world governments to ‘print our way to prosperity’ have been floundering over the last 8 years. Moreover, this has created a system where the government is accumulating debt it never intends to pay off. You can see how this is inevitably going to collapse without reform right? This system has been tried many times through history, it has never remained sustainable even once.

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