We need to change the way the debt limit works

David Malpass Contributor
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Fiscal conservatives need to find a way to restrain spending over the long term. It’s too late to do that before August 2, so Republicans should pass a short-term debt limit increase that allows them to create an effective restraint on spending sometime in the future. The president says he’ll veto a short-term increase, but that’s probably a negotiating position on the way to signing a compromise bill.

If there’s another chance to use the debt limit as leverage later this year, I think Republicans should try a new approach. Our current debt limit is fatally flawed because the remedy is default. It should be replaced with a debt ceiling that forces spending cuts, not default. Fighting over this particular debt limit is harmful for fiscal conservatives because it forces them to choose between default and more debt. It fractures the Republican Party without leading to much in the way of true spending cuts.

The current debt limit is drafted in such a way that it includes past spending, current spending and also the buildup in trust funds. This makes a standstill practically impossible. To keep the $14.3 trillion debt limit in place, Congress would have to cut roughly $14 trillion in spending over the next 10 years, not the $4 trillion (mostly gimmicks) that it dreams of or the $100 billion in cuts it was unable to find in the April continuing resolution. The “no debt increase” position means 10 times more cuts than the $1.1 trillion agreed to in the current negotiation, and those would have to be genuine cuts in cash expenditures, not accounting gimmicks or back-ended cuts. Realistically, that’s not going to happen this year.

In our current game of chicken over a payments shutdown, fiscal conservatives aren’t seeing the Mack truck the administration is driving toward them. It controls the type and timing of the shutdown of payments and orchestrates the criticism, communicating daily at high levels with bond raters, financial markets and the IMF — all of whom advocate compromise. While the battle is underway, the minority feels like it is landing blows. But the end game comes when the president announces sadly that Republicans are preventing student loans and payments to doctors and whatever the president chooses to shut down.

There’s no reason fiscal conservatives should embrace the current debt limit or give it credence. It was written by Congress decades ago to increase spending and debt and to embarrass fiscal conservatives by offering an unsavory choice without actually eliminating any programs or providing any restraint on spending.

Democrats have known this from the beginning, seeing that it was to their advantage to stall and let Republicans knock themselves out proposing spending cuts for entitlements and defending tax loopholes. The president played rope-a-dope, offering no plan himself. The battle is over seats in the 2012 election based on which party is more confidence-inspiring (neither has risen to the occasion.) The Republicans should try a new approach based on replacing the current debt limit with a debt ceiling that has teeth and cuts spending.

David Malpass is president of Encima Global, an economic research and consulting firm serving institutional investors and corporate clients. Malpass is also chairman of GrowPac.com, an organization dedicated to restraining the growth in government. He ran for U.S. Senate in the New York Republican primary in 2010.