Hey Congress: Don’t raise the debt ceiling!

Robert P. Murphy Research Fellow, Independent Institute
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Under current projections, the U.S. Treasury will hit its statutory debt ceiling before summer. This provides the chance for newly elected Tea Party-backed legislators to show they are serious about rolling back Obama’s agenda. The only method to force politicians to make tough budget cuts is to take away the credit card. Congress should refuse to raise the Treasury’s debt ceiling.

First, some historical background: In 1917, as World War I was raging in Europe, Congress gave the Treasury authority to issue debt as it saw fit, in order to provide flexibility for financing the war effort. Federal lawmakers, however, recognized that this might jeopardize Congress’s control over the purse strings, so they put a cap on how much total debt the Treasury could have outstanding at any time.

Over the years, Congress has always raised the debt ceiling in order to allow more government borrowing and spending (although on a few occasions they took their time in doing so). The result has been mushrooming debt, which exploded during the administrations of George W. Bush and Barack Obama.

Currently, the statutory debt ceiling is $14.294 trillion. As of January, the actual debt stood at just over $14 trillion. At the present rate of spending, and with projected revenues flowing into federal coffers, analysts estimate that the feds will hit their credit limit sometime in the next two months.

The figures above refer to the “total federal debt,” which includes “intragovernmental debt” — the debt that one part of the government (the Treasury) owes to other parts (like the Social Security “trust fund”). When economists discuss a country’s “debt-to-GDP ratio,” however, they use a smaller figure, counting only the “total debt held by the public.” For the United States, this smaller figure (as of December) was $9.4 trillion, because $4.6 trillion of the debt was actually held by other government agencies. The different debt totals are both relevant, depending on how we treat the intragovernmental component.

For example, if we treat the Treasury securities held by the Social Security trust fund, and all other intragovernmental debt, as bona fide assets just as we would treat Treasury securities held by an insurance company, then we need to reckon the federal debt as 95 percent of GDP, not the figure of about 64 percent that the press commonly reports. In other words, the only way to “save” Social Security and other cherished programs — by insisting that we treat their holdings of Treasury debt as legitimate assets — is to simultaneously make “the national debt” that much worse.

Treasury Secretary Geithner and others warn that if Congress doesn’t raise the debt ceiling, the world’s financial markets will go into panic because the U.S. government will default on its existing obligations. This is a classic political scare tactic. In fact, the Treasury has plenty of cash flow to make its debt payments.

In the third quarter of 2010, for example, the Treasury took in $604 billion (seasonally adjusted) in revenue. Yet for Fiscal Year 2010, the annual debt service was some $414 billion, working out to an average of about $104 billion per quarter. Since debt service currently soaks up only about one-sixth of incoming revenues, the government doesn’t need to default on its existing obligations, even if Congress doesn’t raise the debt ceiling. Congress just has to lower spending in other categories.

We should never forget that the government has no resources of its own. To insist that the government “honor its debts” is merely to insist that politicians extract money from working Americans to pay those who lent to the government.

The upcoming debt showdown, fortunately, is a relatively easy way for budget hawks to lock in their spineless colleagues. It’s safer to vote “no” on raising the total debt, while remaining agnostic about what to cut. Then, once that decision is made, politicians can tell their constituents they simply had no choice but to slash their favorite pork projects. As proponents have enthusiastically pointed out, saying no to a debt-ceiling increase is a balanced-budget act with teeth.

Robert P. Murphy earned a Ph.D. in economics from New York University and is a senior fellow in Business and Economic Studies at the California-based Pacific Research Institute. He is co-author with Jason Clemens of Taxifornia, available on PRI’s website. Contact him at RMurphy@pacificresearch.org.