Raising the Debt Ceiling Is No Panacea, Because Eventually It's Moot
With Congress deadlocked in a debate over funding for the president's $1.4 trillion new health care entitlement, the fiscal year has concluded with no agreement on a continuing resolution to finance federal government activities. The latest crisis has prompted a public uproar, but it should come as no surprise. Washington has utterly failed to demonstrate any fiscal governance in the face of a budget crisis that has been looming for years.
The traditional budget process has been replaced with a string of continuing resolutions that keep the doors open while Congress limps through an unending series of debt ceiling battles. Indeed, the only tangible budget management policy implemented in recent years has been the sequester, which is only policy by default. This $85 billion cut in spending authority was supposed to be the draconian alternative that forced budget negotiators to act. But the threat proved too weak to force a budget deal, and the sequester became real, resulting in government-wide, across-the-board cuts-not as the result of an orderly budget process, but as a fallback for indecision.
The future holds significant economic problems, and without a more rational approach to fiscal policy, the United States will face real challenges in global markets. The debate over the continuing resolution to fund the government will be quickly followed by another round in the debt ceiling fight. Most analysts suggest that the Treasury will reach the limits of its borrowing authority at some point in the second half of October.
Proponents of raising the $16.7 trillion debt ceiling constantly point to the disastrous consequences for the United States should the nation default on its financial obligations. Credit ratings would be downgraded, raising the cost of capital for the United States in global markets, which, in turn, would impose significant new burdens on taxpayers as the costs of servicing the national debt would increase.
Yet raising the debt ceiling is not the panacea that makes our fiscal problems go away. Fundamentally, global markets are only interested in the United States' ability to service its loans. Raising the debt ceiling simply grants the Treasury the ability to acquire more debt-it does nothing to assure creditors that the nation has the wherewithal to repay that debt. Eventually the debt ceiling will no longer be the binding constraint; instead, borrowing will be constrained by the creditors' assessments of our ability to repay what was borrowed. At that point, the debate over the debt ceiling becomes moot.
And the future is only going to more challenging. The Congressional Budget Office's recent long-term budget outlook paints a bleak picture. Assuming current laws are in effect, the CBO projects federal spending will increase to 26 percent of GDP by 2038, well above the long-run average of 20.5 percent. Federal debt, which rose from 39 percent of GDP at the end of 2008 to more than 70 percent of GDP today, will reach 100 percent of GDP by 2038. The CBO also ran an alternative scenario where some of the current laws that control spending are not enforced-a reasonable assumption given that the current Congress cannot bind future Congresses-and the outcomes are even more disconcerting, with federal debt reaching 190 percent of GDP by 2038.
The nation faces a long-run fiscal gap of $222 trillion, according to economist Laurence Kotlikoff; and without effective fiscal management, the nation faces an economic contraction as well as higher taxes. For too many years, spending on entitlement programs such as Social Security was assumed to be the "third rail of politics" that no one wanted to touch. As a result, little has been done to address the fiscal imbalances created by these programs. Mandatory spending, which includes entitlements and interest payments, is on track to consume more than 25 percent of the federal budget by 2023. And spending on health care entitlements and Social Security is expected to consume 14 percent of GDP by 2038-double the current 40-year average of 7 percent. Not only is it time for politicians to touch the third rail, they need to grab it with both hands and address the coming crisis head-on.
