The Debt Limit Can Save Us

In a gift to humanity, way back in 1917, the Second Liberty Bond Act established an aggregate debt limit. Since then, Congress, much to its chagrin, has had to lift the debt limit whenever it is about to be breached. There is perhaps no more painful vote for a politician of either party than the debt-limit vote. Spending increases can be celebrated as humane attempts to support social justice without raising a murmur from the electorate. But during these votes, everyone sweats profusely awaiting the final tally. That’s why it is common for the party out of power to slow-roll the debt-limit increase. It is a way to make the party in power own, perhaps unfairly, all the cumulative fiscal irresponsibility that has piled up since the last increase. It is the only time that those responsible for runaway spending are made to feel at least a little bit bad about it.

So far, it has always worked out in the end. The government-debt limit is decried in the media as a horrible sideshow that risks the good credit rating of the U.S. government. We have been told that the world is about to end and that financial collapse is upon us if the ceiling is not lifted, until, like clockwork, victory is snatched from the jaws of defeat at the last minute. If it feels like the kabuki is getting old, perhaps that’s because it is. In 1949, the federal-debt limit was $49 billion. Since 1949 it has been increased 92 times, or more than once per year, allowing the debt to climb all the way to $28.5 trillion. The debt-limit show runs more often than the World Series!

To be sure, some of those debt-limit increases were almost as entertaining as the World Series, and sometimes they have actually led to sound policy. In 1979, for example, a Democratic Congress lifted the debt limit but required that future budgets be balanced. In 2011, the divided Congress lifted the debt limit but tied it to the Budget Control Act that was designed to reduce the deficit sharply.

Despite those minor victories, in the end, shame over lifting the debt limit has had little long-run impact. In 1947, government spending took up 13.81 percent of GDP. The July CBO estimate suggests that government spending as a portion of GDP will be just shy of 31 percent for 2021 — 10 percentage points higher than the levels reached in 1942, when the war machine was ramping up to engage in World War II. While votes over the government-debt limit are painful for politicians, the inexorable increase in debt indicates that it is largely toothless.

Today, Democrats are proposing to ram through a giant budget package that will continue to run deficits approaching World War II levels, but they are wary of lifting the debt limit all by themselves, for fear of scaring the tar out of voters. Sensing weakness, Republicans have vowed to make Democrats do it alone.

If they do, the history just discussed will make it clear that Democrats will lift the debt limit (probably past the midterm), experience some pain, and then go on with their business as if nothing ever happened. A year from now, all will be forgotten, and government spending will have continued to trend upward.

Against that backdrop, Republicans have a much smarter play than simple opposition. Over the past decade, an average of around 55 percent of Americans have said they are concerned “a great deal” about federal spending and the budget deficit, according to Gallup. A balanced budget would be appealing to those voters, and the current debt-limit vote can help Republicans achieve it and grab political credit for it.

As a reminder, if the debt limit is hit, that just means that the government cannot borrow to fund current spending. It needs, in real time, to make sure that it has the revenues coming in to cover spending. It’s like a balanced-budget amendment on steroids. Of course, if we were to hit the debt limit in October, we would have few cash reserves, and little ability to pay interest and keep government running. That’s the problem. Republicans have tended not to think about the debt limit until the last minute.

But if, on the other hand, Republicans plan ahead, and agree to lift the debt limit enough for say, the next three years of spending, but then require a supermajority of votes in the Senate to lift it thereafter, policymakers will have committed to a future balanced budget, while giving themselves a few years to get their ducks in a row to make it as painless as such a process can be. While a simple-majority vote could overrule the supermajority rule, the legislative history of such rules is that they tend to stick. It’s the easiest path imaginable to a balanced-budget amendment.

Democrats are terrified enough about the midterm elections that they might well take a deal that allows them to spread the blame around for the ten trillion or so dollars’ worth of debt that needs to be added to the limit now. If they do, Republicans should grab the opportunity to lock us into a path for a balanced budget. If they don’t, adopting this approach should be top of the agenda when they recapture Congress.