House Passes A Clean Increase – Some Debt Ceiling Ramblings

Good morning, Roosevelters! I have some commentary on the recent debt ceiling hike along with, what I hope is, a refutation of one of the most common arguments against raising the debt ceiling: that it is a blank check for new spending (hint….it isn’t). I hope it provides some insight!

Chirag

The Debt Ceiling Hike

Numerous news sources put this story out, but one of my favorites is The Guardian. It seems House Republicans finally pushed through a clean debt ceiling hike. On second thought, no they didn’t. If you look at the 221-201 vote, only 21 votes came from Republicans. The article aptly mentions that there is still the potential for disgruntled Republicans (can anyone say Ted Cruz?) to use stalling tactics in the Senate. I’m normally not one to worry about vote counts but on this issue, every vote matters. For those of us who are new to the economics of the debt ceiling, I’ll do my best to explain it as I understand it.

Ok, so we all know that the United States Congress is responsible for appropriating money for whatever it wants to spend on: Medicare, Medicaid, Defense, Discretionary, Interest Payments, etc. However, the United States is special in that our funding mechanism doesn’t end there. In other countries, when spending is appropriated, it is usually legally assumed that authority has been given to the Executive arm of government (in this case the Treasury) to use all appropriate means to spend the money. If the government is running a deficit, that means borrowing. As evidenced by our debt ceiling, the process is separated in the United States. Congress appropriates money, then it must raise the debt ceiling to grant borrowing authority. If it doesn’t raise the ceiling, the United States will have authorized spending (spent money) but would not be able to pay for it. In economic language, the government would go into default.

One of the most common arguments used against raising the debt ceiling is that we are encouraging profligate spending. As evidenced by the process, the debt ceiling’s sole purpose is to allow the government to make payments on items already spent. There is no new spending implied solely by a debt ceiling hike, a mere budgetary mechanism. How then is this budgetary mechanism exploited to such a dangerous degree? That’s politics. The only other democratic nation in the world with a debt ceiling is Denmark (which keeps it at a level almost impossible to hit) and other countries don’t even have a separation between spending and borrowing authority. Why do we even have a debt ceiling then? That’s a question for another time but its clear, to me at least, that if we are to avoid having the debt ceiling as a political weapon based on false observations of our budget process, we may just need to scrap it all together.

I’ve included some interesting articles, including to the recent Guardian story, below. Rest assured, this isn’t the last you’ve heard from me on the debt ceiling. Have a good one!

The Guardian link: http://www.theguardian.com/world/2014/feb/11/debt-bill-passes-house-republicans-boehner

The Treasury’s Debt Ceiling Description: http://www.treasury.gov/initiatives/pages/debtlimit.aspx

Economic Policy Institute’s Reasons to Scrap the Debt Ceiling: http://www.epi.org/blog/6-reasons-debt-ceiling-scrapped/

Denmark’s Debt Ceiling: http://www.usnews.com/news/articles/2013/10/11/why-do-only-us-and-denmark-have-a-debt-ceiling

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