U.S. government shutdown: Is the debt ceiling a 'stupid' idea?

With the deadline for debt default looming in the U.S., economists tell CBC News the debt limit is "stupid" and should be abolished.

Economists want the U.S. to get rid of its debt ceiling, tie debt to spending

The debt ceiling dates back to the First World War and legislation in 1917 that was designed to make it easier for Washington to raise money for the war effort. (Larry Downing/Reuters)

The U.S. has had a debt ceiling, limiting the amount of money the government can borrow, for nearly a century. But the idea hasn't caught on with other nations (only Denmark has something similar) or with economists.

John Blank, chief equity strategist for Zacks Investment Research, calls the debt ceiling "incredibly stupid," adding that the vast majority of “economists do not think that it's a good idea.” 

He cites a University of Chicago January survey of  U.S. economists that found 84 per cent of them agree or strongly agree that  “a separate debt ceiling that has to be increased periodically creates unneeded uncertainty and can potentially lead to worse financial outcomes.” Only three per cent expressed any disagreement.

Rick Newman, who blogs for Yahoo Finance, calls the debt ceiling "a global laughingstock" while Matthew Yglesias, Slate's business and economics correspondent, writes that it's "the legislative equivalent of an infected appendix — an aspect of the political system that no longer has any constructive role to play in the governance of the nation but can nonetheless cause trouble."

Danish economist Jacob Kirkegaard says there's no "economic justification for it whatsoever," only a political justification.

Origins in WWI

The debt ceiling dates back to the First World War and legislation in 1917 that was designed to make it easier for Washington to raise money for the war effort.

The ceiling part was intended to put some kind of congressional limit on the president's ability to raise debt by issuing bonds.

Economist Jacob Kirkegaard says no country in the world has a problem analogous to the U.S. debt ceiling. (Courtesy Peterson Institute for International Economics)

In Denmark, the debt ceiling dates back to the 1990s. Denmark was transferring day-to-day management of the national debt to its central bank from the finance ministry, and since the bank is independent of the government, some sort of limit on borrowing was required.

Kirkegaard told CBC News that Denmark's debt ceiling was set at about three times the national debt at the time to ensure the bank had freedom to manoeuvre.

That is similar to how the concept took root in the U.S., as well. At the end of the First World War, Congress set the debt ceiling at almost twice the national debt at the time.

But over the last two decades it raised the ceiling 18 times to pay for government programs, tax cuts and foreign wars.

Denmark's initial debt limit also didn't last that long. In the midst of the global financial crisis that began in 2008, it looked as if the country might reach its debt ceiling, a result of the politicians failing to link the ceiling to inflation, Kirkegaard explained.

Then Denmark doubled its debt ceiling again, to keep the issue from becoming a political football.

"Having a debt ceiling is not inherently stupid, there can be valid political and constitutional reasons for it," Kirkegaard says. "But it needs to be put together in a way that it has no practical day-to-day political impact.

"Once it has that, it becomes a stupid law."

Different from balanced budget law

Kirkegaard, who is a senior fellow at the Peterson Institute for International Economics in Washington, says the two debt ceilings are only similar legally, in that both of them have a binding limit on what the respective governments can borrow.

U.S. President Barack Obama met with U.S. House of Representative leadership Tuesday as the debt ceiling deadline inched closer. (Jason Reed/Reuters)

But in political terms, he said, they are "absolutely not" similar.

Having looked closely at debt ceiling laws, Kirkegaard says he can find no other country where the issue is comparable to the U.S.

Some countries have balanced budget requirements, which can force governments to take sometimes difficult steps to cut spending if debt or deficits get out of hand. But these are not the same as a debt ceiling, which can affect a country's borrowing ability and credit worthiness.

In the European Union treaty there is a clause that says a country's debt should be below 60 per cent of its GDP. But Kirkegaard notes that goal is not legally binding.

U.S. spends without deciding how to pay for it

The U.S. actually reached its debt limit -- $16.669 trillion -- in May, economist John Blank notes. Since then the U.S. has been funded by what are called "extraordinary measures," a safety valve that is now about to run out.

For many Republicans, as their Senate Leader Mitch McConnell put it, "If we’re going to address the debt ceiling, then let’s also address the root causes of our debt."

McConnell estimates Washington is borrowing nearly $2 billion every day, essentially to cover spending Congress has already approved.

John Blank says a key reason the vast majority of economists favour abolishing the debt ceiling is how much it sets back economic growth. (David Zentz Photography/Courtesy Zacks Investment Research)

So the current debate isn't over what the government spends or how it taxes, it's about how to pay for the spending that taxation doesn't cover.

The debt ceiling was not much of an issue until 1995, when the Gephardt rule was repealed. Named for Democratic congressman Dick Gephardt, and in effect since 1979, the rule meant the debt ceiling would rise whenever a budget was passed, based on the amount of spending that was authorized, Blank explained to CBC News.

But, in 1995,with Democrat Bill Clinton in the White House, Newt Gingrich, then the Republican leader in the House of Representatives, saw that he could replace the Gephardt rule with "negotiations on the debt ceiling and use it as a whip to get people to make deals" with him, Blank said.

In his view, the debt ceiling is now "based on a divisive cudgel mentality that was propagated by a minority leader who was looking for a way to bully the president."

Abolishing the debt ceiling?

Blank says a key reason the vast majority of economists, including Republican economists, favour abolishing the debt ceiling is because of how much it sets back economic growth.

Blank points to an economic model that say this year's political strife has already cost the U.S. economy one per cent of GDP.

He supports a bipartisan proposal that's been around since 2011 called the Biennial Budgeting and Appropriations Act.

Sponsored by two senators, Republican Johnny Isakson and Democrat Jeanne Shaheen, it would do away with the debt ceiling and switch Congress's budgeting to a two-year process, with year one devoted to appropriation and year two for oversight of that spending.

That way, Blank said, the government could avoid these regular debt crises and even free up more time to actually govern.


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