The “debt ceiling” is a statutory cap on the amount of money the federal government is permitted to borrow. Introduced during World War I, the debt ceiling has been raised by vote of Congress dozens of times as federal debt has grown. A statute raising the debt ceiling must, like all federal statutes, be passed by both houses of Congress and signed by the President (unless his refusal to sign it—his veto—is overridden by a two-third vote of each house of Congress) before it can become law. The Republican members of the House of Representatives, who have a majority in the House and are preoccupied with federal debt and determined to reduce it solely through reductions in government spending, have lately taken to threatening to vote against raising the debt ceiling, as a lever to induce spending cuts.
The concern with the size of the federal debt is legitimate but the debt ceiling is an illegitimate device for seeking to limit the debt. The reason is that the ceiling enables the requirement that I just mentioned that legislation to be valid be passed by both houses of Congress and signed by the President to be circumvented. The various programs that require federal spending—programs that range from defense expenditures and civil servants’ salaries and agricultural subsidies to Social Security benefits and Medicare benefits—were all enacted by Congress in the prescribed manner. If the government cannot fund the programs without borrowing, a refusal by Congress to raise the debt ceiling operates in effect as a partial repeal of the statute creating, and prescribing or authorizing funding for, the program. The repeal of a statute is governed by the same requirements as initial promulgation—passage by both houses of Congress and presidential signature. By refusing to vote to raise the debt ceiling, therefore, the House of Representatives would be effecting a partial repeal of many federal programs, all duly authorized, all by itself, without the concurrence of Senate and President.
This strikes me as improper but also as reckless because of the possible economic consequences. It is true that defaulting on bonds and other securities issued by the federal government could be averted simply by paying the holders of federal securities ahead of other persons entitled to money from the government, such as social security annuitants, civil servants, military personnel, and contractors who sell goods and services to the government and are owed payment. Debt service—interest on government securities—is actually only a small part of the federal budget. But because the federal deficit (the excess of revenue over expenditures) was $1 trillion this past year—though that was 20 percent below the deficit in 2011, a result of the economy’s improving—a reduction of the 2013 deficit to zero because the debt ceiling wasn’t raised would cause substantial economic dislocation, so substantial that the Republicans are now willing to raise the ceiling to avert a default, though only for three months.
As I said, I think the use of the debt ceiling as a bargaining lever is improper because the debt ceiling is improper. But I also think that the conservative policy of reducing federal debt by cutting non-defense spending including entitlement spending while raising defense spending, rather than reducing federal debt by raising taxes, is a nonstarter. As Nate Silver pointed out in an article in the New York Times earlier this week (see http://fivethirtyeight.blogs.nytimes.com/), most types of federal expenditure have not grown faster than the economy in the last forty years and as a result have not contributed to a debt crisis. The big exception is the growth in entitlement spending, a growth due to a considerable extent (about half) to growth in outlays for medical expenses. Entitlement spending is very difficult to cut as a political matter. That would not be a problem if non-entitlement spending could be cut, but that is very difficult to do as well. Every federal expenditure program is walled and moated by the interest groups that benefit from the program.
Some cutting is probably politically feasible, such as closing some tax loopholes and cutting some deductions, reducing social security and Medicare for people who have a high income, reducing (rather than increasing, as conservatives want) our enormous military budget, and laying off supernumerary civil servants. But the aggregate savings are likely to be smaller than the annual growth in Medicare and social security payments and the federal share of Medicaid payments. So the amount of federal debt will grow, and if it grows by more than 3 percent a year it will grow faster than the economy, though the annual deficit will continue to shrink as the economy improves and therefore tax collections increase while outlays for unemployment benefits and other “automatic stabilizers” (spending programs that expand during a recession or depression in order to reduce its adverse effects) decrease as an additional consequence of an improving economy. Rising debt will at some point result in higher interest rates, which will further increase the expenses of government and hence the debt. And those higher rates, which will spread to all borrowers, will reduce the capital available for business growth. If I am right that realistically government expenditures can’t be cut enough to offset growing entitlements expense, the only answer to the growing debt is higher taxes, though there are of course political obstacles to raising taxes. Assuming those obstacles can be overcome, the social costs of higher taxes would then have to be compared with the social costs of higher government debt to determine whether taxes should be raised or the debt increased.
I want to close by returning for a moment to the issue of entitlement spending, to underscore my conviction that such spending will continue to grow faster than the economy. The term “entitlement”
is unfortunate, as it gives rise to phrases like “entitlement society.” To claim an “entitlement” sounds like something only a person who is spoiled would do. But we don’t speak of contracts in general, including health insurance policies, as creating “entitlements,” but rather as creating legally
enforceable rights. The “entitlement” programs are different only because they are forms of insurance that are highly subsidized. They are forms of redistribution. But all modern societies engage in redistribution, thus rejecting social Darwinism, and have been doing so for some time. Bismarck was the pioneer, pressing successfully for the enactment of publicly financed health, accident, and disability insurance, and retirement benefits—and he was no socialist!
The elderly are a powerful political bloc (relative for example to children) in the United States and other wealthy countries, and, despite the nation’s wealth, because the wealth is very unevenly distributed most of them couldn’t enjoy a comfortable old age if they didn’t have Medicare and Social Security. As the population ages because of increased longevity attributable in significant part to advances in medical technology, outlays for Medicare and Social Security will increase. (While it is true that the growth in Medicare outlays has slowed since the recession began in 2008, this is because of falling incomes, which make co-pays and deductibles seem more costly, and thus reduce consumption of medical services. Rapid growth of medical outlays can be expected to resume as the economy improves; and feasible fiscal reforms—moderate and therefore politically acceptable economy measures—are unlikely to reduce the rate of growth enough to allow the government’s debt to be controlled without any increase in tax rates. Higher taxes or higher debt: those I think are the alternatives to focus on.