The Return of the Debt Ceiling

A cold front obscures the view of the northeastern US from the debt ceiling. Source: Getty Images News.

The 107^th debt ceiling increase sailed through Washington Sunday, despite the fact Congress wasn’t even in session.

No, we’re not suggesting the Obama administration scandalously did an end run around the Constitutional legislative process—we’re pointing out the fact the debt ceiling is now back from a three-month vacation, new and improved. Said differently, it’s higher. In other words, it’s again not actually much of a ceiling. In our view, this episode is just more evidence we should send the debt ceiling on a permanent vacation.

This quiet increase following a (wonderful) hiatus is the result of the bizarrely titled, “No Budget, No Pay” Act, passed by Congress and signed into law in February. This bill paired a temporary waiver of the debt ceiling with the notion Congress wouldn’t be paid if a budget wasn’t agreed to by “a House of Congress” by April 15, 2013. Both houses of Congress met that deadline, of course, by passing a budget. You see, the law doesn’t say the House and Senate must agree with each other on a budget. So each passed an entirely different budget, avoiding escrowed paychecks, and the government is still operating under continuing resolution. Moreover, even if escrow had kicked in, the law stated Congress would’ve received the escrowed pay at the end of its term. (And there are questions about the constitutionality of that principle too, as it may violate the 27^th Amendment.) Hence, it seems the bill was quite a misnomer indeed—as delightful as the prospects of unpaid congresspeople may seem to some. (Well, to us.)

The upside of the unfortunately monikered legislation was the debt-ceiling political football was rendered null for three months. And, nothing happened. Well, not nothing. Government spending and borrowings continued. The sun rose and set. Now that ceiling’s back, the level’s simply been raised to cover the additional couple hundred billion in new borrowing.

Which means, the debt ceiling not only exists again, we’ve hit it.

Of course, this needn’t imply a crisis looms. The debt ceiling just isn’t the threat some seemingly think. Yes, the government has deep couch cushions, and it seems newly appointed Treasury Secretary Jacob Lew has managed to dig up enough change to fund government fully through roughly September 2. (Though these deadlines are really just guesstimates and are often extended.) But more importantly, even if these so-called extraordinary measures expire, a default isn’t necessarily in the cards—you see, the debt ceiling allows bond issuance to refinance principal. That leaves interest, and interest payments amount to less than 10% of the Federal Government’s 2012 tax take. According to the CBO, receipts have risen sharply in 2013 to date, due to the payroll tax cut expiration, higher April 15 receipts and continued economic growth. It’s true the Feds would still have to dial back other spending—essentially, prioritize payments—but the Treasury has the authority to do already, and the rising receipts likely mitigate this still further.

But in a sign politicking over the debt ceiling is back from vacation too, last week the House passed a bill mandating a specific order of payments for the Federal Government. The bill designates US government bondholders and Social Security recipients as the government’s most senior creditors—they’d be paid first should no debt limit increase take root.

We guess they’re targeting clarity with this bill. And clarity is good! But it would be much more clear to simply eliminate the debt ceiling. We are one of only two nations in all the developed world using a debt ceiling. The austere Australians don’t have one. Neither Germany nor the Netherlands has one. There’s just no correlation between low government debt and the use of a debt ceiling. In Q1, when the debt ceiling was sent a-packin’, no calamity ensued and borrowings didn’t spike. Predictable, because the debt ceiling has nothing to do with the amount of outstanding debt—that’s entirely determined by earlier decisions made in the budgeting process.

The only reason we still have a debt ceiling is because it affords a means for politicians to act like they’re putting the (politically popular) brakes on US debt—a fundraising tool. And for that reason it seems likely to us that the debt ceiling’s here to stay for the long term. It just won’t stay at its present level very long. All in all, we’re stuck with the thought that a three-month period of no debt ceiling and no calamity implies it’s really an unnecessary annoyance.