America's debt limit is close to dying. No one should mourn its demise.
President Donald Trump and Senate Democratic Leader Chuck Schumer, D-N.Y., have a "gentleman's agreement" to scrap America's debt ceiling, according to a report from The Washington Post. If the House and Senate actually do this — and that's a big "if" since House Speaker Paul Ryan, R-Wis., doesn't love the idea — it would be a major win for Trump and the country.
The vast majority of economists across the political spectrum agree with Trump and Schumer on this one. There's a simple reason for that: The debt ceiling is not working. It was created to control the debt, but one look at America's $20 trillion debt shows how useless it has been at that goal. Even worse, the debt limit has become a political football that has repeatedly put the "full faith and credit" of the United States at risk, something that is costly and potentially catastrophic to the economy.
"The debt ceiling no longer makes any sense," says Doug Holtz-Eakin, head of the right-leaning American Action Forum and a leading voice calling for the United States to reduce its debt. "The empirical evidence is in, and it doesn't work."
The debt limit was created in 1917, when World War I arrived and the U.S. government needed a faster way to borrow money than waiting for Congress to approve every single bond issue. Here's how it works: Congress sets a cap on how much money the U.S. Treasury can borrow, similar to maximum limit on your credit card. The current debt ceiling is $20 trillion. Treasury can't surpass that without Congress voting to raise the amount (or to suspend the limit for a while). But there's a major problem with the credit card comparison: Congress has repeatedly approved budgets that spend way more money than the current debt limit allows.
The United States has one process to debate the budget and an entirely separate one to decide on the debt ceiling. It's confusing and bizarre.
"Congress should deliberate how government spending programs will be paid for before they pass them," says Bernard Baumohl, one of many economists who agree with Trump and Schumer that it's time for the debt limit to go.
The Washington Post spoke with 18 economists for this story. 14 said to ditch it.
The others made similar points to House Speaker Ryan: While they don't think the debt ceiling is functioning very well, they wouldn't want to see it go away entirely, unless it was replaced with something else to prevent U.S. debt from exploding.
"We fear runaway government debt much more than a government shutdown," argues Matthew Fienup, executive director of the Center for Economic Research and Forecasting at California Lutheran University.
But the majority of economists told The Washington Post that the debt limit is broken beyond repair. Congress continues to approve massive spending. Then the bills arrive at Treasury. There's not enough money to pay them, so Treasury has to borrow money, but it gets close to the limit and then there's a crisis. Treasury asks Congress to raise the debt ceiling, but some lawmakers threaten not to do that unless they get something in return (even though they were the ones who spent the money in the first place). This has happened repeatedly, especially in the past eight years. It has nearly caused the U.S. to default in 2011, in 2013 and again this year, a event that would be disastrous for the economy and financial markets.
"The debt ceiling only serves to create high-stakes showdowns that must be resolved in favor of issuing more debt," says John Ryding, chief economist at RDQ Economics, who supports ditching the limit.
Since 1960, Congress has raised or suspended the debt limit 78 times, according to the U.S. Treasury website (soon to be 79 times after the latest deal). Whenever the United States gets close to the debt limit, it costs America even more money because people who buy U.S. bonds demand higher interest rates due to the uncertainty over whether the U.S. will actually pay its bills on time. Thus the debt limit has actually been costing America more money lately, the exact opposite of what it was intended to do.
In July, a well-respected bipartisan pair came together to publish a Wall Street Journal op-ed with the headline: "Don't Raise the Debt Limit — Repeal It." Jason Furman, President Obama's top economist, and Rohit Kumar, a former top staffer for Senate Republican leader Mitch McConnell, R-Ky., argued that the "the right move is to eliminate the debt limit permanently." They pointed out that no other country has anything like this.
Martin Barnes, an economist at BCA Research in Canada, was even more blunt: "The debt ceiling is a very strange piece of legislation."
Furman and Kumar received some pushback for their op-ed, mainly because they spent a lot of time saying what was wrong with the debt limit and little time outlining an alternative. The ideal scenario would be to repeal the debt limit and replace it with something far better, something that actually helps control spending without getting perilously close to a default.