On the Debt Ceiling-Becker

Various attempts have been made to introduce rules that limit the aggregate level of federal spending, such as restricting the growth in spending over time to be no greater than the growth in GDP (aside from wartime and other emergencies). Balanced budget proposals do not limit spending per se, but require that enough taxes be raised to cover whatever level of spending passes the legislature and chief executive. However, neither spending limits nor balanced budget rules have ever received enough votes from Congress, although many states and local governments do require a (nominally) balanced budget.

The “debt ceiling” is much closer to balanced budget rules than to limits on federal spending since it tries to cap the budget deficits that are solely responsible for the growth in debt. As Posner shows, this so-called “ceiling” is not really a ceiling since it can be lifted by a majority vote in both houses of Congress combined with the support of the President. In fact, Congress has raised the ceiling more than 85 times since 1940, and 11 times since 2001.

More economically meaningful ceilings would relate debt to the level of GDP- and perhaps also to interest rates on the debt- since countries with higher incomes and lower interest rates can afford to carry higher debt levels. One good reason to have properly defined debt ceilings, even though the President and Congress must approve every piece of spending and taxing legislation, is to force politicians to discuss how this legislation aggregates to produce shortfalls or surpluses between total spending and total tax revenue. Budget deficits are far more common than surpluses in recent decades.

A further possible reason for a proper debt ceiling is to give “salience”, to use a term from psychology, to the deficit issue by requiring explicit consideration of deficits that push debt above its ceiling. Its salience is reinforced by media coverage of the debates over raising the ceiling, and of the different positions on raising the ceiling by Republicans and Democrats, or by different members within each Party. Studies in economics as well as psychology have shown that salience can affect behavior, such as how much people avoid flying after terrorist attacks on planes.

Unfortunately, the salience placed on raising the debt is somewhat misplaced since the effects of governments on economic and social life are mainly determined by the level and composition of government spending, not by deficits or debt per se. Raising sufficient taxes to cover large and excessive spending would be worse than keeping spending within reasonable bounds while financing some with debt.

Ultimately, the only way to evaluate debt ceilings is to determine how much they affect the level and composition of spending and taxation. That would not be easy to do in a credible way because of the difficulty in determining the counterfactual; that is, what would have been spending and taxation by the federal government in the absence of the debt ceilings? Perhaps that is why I have not found such a study.

While federal government spending in real terms has grown manyfold since the end of World War II, the ratio of debt subject to the debt limit to GDP was a manageable 57% in the year 2000. This ratio has grown rapidly since then, especially during the past four years, and it is now about 98%, higher than most other rich countries. Clearly, debt ceilings have not prevented spending and taxation from growing significantly over time. Nor would the present ratio of debt to GDP be a big problem as long as interest rates remain low.

I mentioned earlier that what counts most for an economy is not the ratio of debt to GDP, but that of government spending to GDP. This ratio will increase or decrease as GDP grows slower or faster than government spending. A decline in this ratio would be achieved if GDP resumes its long-term growth rate of a little over 3% per year, and if the growth in entitlement and other spending were kept under control. It remains to be seen whether the American economy will regain its long-term growth rate, and whether interest groups and politicians will resist the temptation to have government spendingcontinue to grow at a rapid rate.

Comments

[Ricardo]

Speaking of debt spending, Prof. Becker how do you respond to the grossly unresponsible spending of the last 2 republican administrations as seen here:zfacts.com/p/318.html ?

[David Johnston]

It isn't, or shouldn't be, a matter of partisanship. This piece doesn't mention Bush, Clinton, Bush, or Obama. The fact is that we have a debt to GDP ratio which now exceeds 100%. As mentioned in this post, that is above most other wealthy countries and will create serious problems if and when interest rates rise above historic lows. In any case, as we're taught as children, two wrongs do not make a right. Using previous failings as an excuse to continue the same failing policies is unproductive and will not ever result in needed change.