With the ink on the budget deal barely dry, Congress now faces an even more daunting challenge — a vote to raise the debt ceiling. As the U.S. Treasury announced this week, the nation has officially maxed out its credit card. Congress must use this opportunity to put new constraints on runaway federal spending while implementing significant and immediate spending cuts.
Currently, the gross national debt stands at $14.346 trillion, which exceeds the statutory limit of $14.294 trillion. The Obama administration has issued dire warnings that a failure to increase the ceiling will cause irreparable damage to the nation’s credit ratings that would trigger a global economic crisis. Yet without steps to address the underlying problems — excessive spending, unsustainable entitlement programs, and structural biases towards deficit spending — raising the debt ceiling is a short-term salve at best that would do little to repair the nation’s reputation in global markets.
Despite the panicked rhetoric of the administration, failure to increase the debt ceiling does not spark an immediate economic meltdown. International credit markets are concerned about debt owed to foreign countries (with China and Japan being the two largest holders of U.S. debt). Financial and accounting practices allow the federal government to adjust its intra-governmental debt in ways that will allow payments to foreign debt-holders. Indeed, after the federal government hit its debt limit, Treasury Secretary Tim Geithner began to implement such measures. In effect, like any stressed business, the federal government has some flexibility to prioritize creditors to ensure it remains viable.
But this can only be a short-term solution. The government is currently accumulating roughly $140 billion in debt every month, and the books can only be juggled for so long. The Treasury estimates that by early August, short-term measures to cover the debt will dry up. Ultimately, the long-term solution requires three important reforms: significant and immediate spending cuts, entitlement reform, and institutional reforms such as a balanced budget to counter the current bias toward deficit spending.
Keynesian economics sparked a significant departure from the historic norm of balanced budgets by offering politicians a justification to increase spending in times of lagging aggregate demand. Consequently, U.S. deficit spending was virtually institutionalized over the 20th century, with only three years without a deficit since 1970. Recurring deficits — outlays consistently exceeding revenues — are a major component of the mounting federal debt, and an important indication that real reform must address the inherent bias toward debt.
While the debt ceiling provides a valuable snapshot of fiscal choices made by Congress, historically it has done almost nothing to stem the rising tide of debt. Since 1939, Congress has increased the ceiling 79 times, from an initial level of $49 billion to the current debt ceiling of $14.294 trillion. The increase in 2010 alone totaled a massive $1.9 trillion. This time, Congress cannot afford a pro forma increase in the debt ceiling.
What can be done? First, Congress need not be bullied into a pro forma vote to increase the debt ceiling. A failure to increase the ceiling may prove challenging for a federal government prone to excessive spending, but it does not mean an instant default. Time exists to implement reforms that target the more fundamental causes of the spiraling debt. Legislation introduced by Sen. Pat Toomey (R-PA) and Rep. Tom McClintock (R-CA) would help ensure the nation’s credit rating is not harmed. Their “Full Faith and Credit Act” would require the U.S. Treasury to prioritize payments to debt held by the public above all other spending. Debt payments would continue, but the government would be forced to make important decisions about other spending programs.
Immediate and significant spending cuts must be adopted. The federal government is currently spending well beyond $1.75 for every $1.00 it receives. All federal spending should be on the table, with a goal of reducing the deficit by $300 billion, effective immediately. This includes discretionary spending, defense spending, and, importantly, entitlement programs, which are responsible for a rising and unsustainable proportion of all federal spending. Full repeal of Obamacare would be a good start.
Additionally, any solution to the debt problem requires important institutional reforms that break the existing cycle of recurring deficits and rising debt. One such proposal is a balanced budget amendment that would constitutionally constrain the appetites of Congress. Senators Mike Lee (R-UT) and Orrin Hatch (R-UT) have introduced a resolution to adopt such an amendment. It would establish federal spending at a level no higher than 18 percent of GDP, and require a two-thirds majority in each chamber to raise taxes or increase spending, and a three-fifths majority to increase the debt limit. This would go far toward re-establishing the traditional norm of balanced budgets.
The debt ceiling poses a challenge to Congress. The need to increase the limit clearly indicates that the fiscal policies of the past have failed and a new direction is needed. A simple vote on the debt ceiling offers no chance to address the underlying imbalances that exacerbate the debt problem. Congress should use any discussion of the debt ceiling as an opportunity to tackle the real problem: profligate government spending. Tea Party activists engineered one of the most dramatic political upheavals in American history fueled by concerns over spending in Washington. The new Congress now must do its part and tackle the problem at its roots, not just look at the symptoms.
Matt Kibbe is president and CEO of FreedomWorks, a nation-wide grassroots organization fighting for lower taxes, less government and freedom and the author of Give Us Liberty: A Tea Party Manifesto.