The Federal Government’s Debt Ceiling Needs More Teeth

Merely raising the debt limit one more time will not solve America’s fiscal crisis. Congress has repeatedly demonstrated that it does not perceive the debt limit as a binding constraint on its spending. Every time the accumulated federal debt approaches the limit, Congress raises the limit. If we are to truly limit the federal government’s spending and debt, we must create a new debt limit, one which Congress cannot increase on its own. Instead, we should embody the debt limit in an amendment to the Constitution so that only the consent of three-quarters of the states can raise it. Only then will Congress take the limit seriously.

To understand why a constitutional amendment is needed, let’s look at how we got here.

On October 14, President Biden signed legislation, passed a few days earlier by Congress, which raised the debt ceiling – the total amount of debt the federal government can legally carry – by $480 billion to $28.9 trillion. This delayed for a few weeks the “debt crisis” we have heard about. Suppose the debt ceiling is not raised again by early December. In that case, the United States Treasury will run out of cash, unable to borrow enough money to pay for expenditures that Congress has already legislated. That would effectively force the government into default, unable to meet its financial obligations and forcing it to prioritize some payments over others. No one is quite sure how that would work, but some results are fairly certain. Interest rates on U.S. federal government debt – especially U.S. Treasury Notes – would increase because purchasers of these debt instruments would perceive a higher risk of default in the future. This would make purchasers more reluctant to loan money to the federal government, which investors do when they buy Treasury notes, bonds, and similar investments. As a result, U.S. taxpayers would pay higher taxes to finance the same amount of federal government activity due to the higher interest costs.

The United States has never defaulted on its debt, but we have had close calls like the current situation many times before. In May 2011, the federal government hit the debt ceiling. Extraordinary accounting measures delayed the date on which the government would run out of cash until August. Even so, the debt ceiling was raised mere days before the money was exhausted. Not long after that, in December 2012, the government hit its debt ceiling again. Extraordinary measures delayed the reckoning until the debt ceiling could be raised again on October 17, 2013.

First created by the Second Liberty Bond Act – passed by Congress and signed by President Wilson in 1917 – the debt ceiling is intended to constrain the federal government’s spending. Congress and the President cannot spend too much money, the thought goes, if the debt is limited, much as a teenager will not spend too much of their parents’ money if their credit card has a low credit limit. But the debt ceiling has repeatedly failed to achieve its purpose. Rather than limit its spending to avoid getting near the limit, Congress has often run its budget up against the ceiling and then proclaimed to the American taxpayers that the debt ceiling must be raised or else the federal government will go into default.

The problem is that the debt ceiling has no teeth. Congress itself created the debt ceiling, and what Congress makes, Congress can change. It is as if parents gave their teenagers the authority to change the credit limit on the credit card unilaterally. If teenagers are so immature that a low credit limit must constrain them, they are presumably too silly to be trusted not to increase their credit limit when given the opportunity. So too with Congress. For the debt ceiling to be a binding constraint, Congress must not be empowered to raise its debt limit.

For a solution, we must turn to a field of economics called Public Choice, specifically Constitutional Political Economy. Public Choice is the use of economic theory to study the behavior of governments. Economics explains the “private choices” of rationally self-interested individuals in markets (both free and regulated). But we can use the same economic theories to describe the “public choices” of government officials – including legislators, bureaucrats, judges, and executives (presidents and prime ministers) – as well as the behavior of voters. Meanwhile, Constitutional Political Economy is a branch of Public Choice that seeks to design the Constitution of a state to align incentives to promote the best behavior. Constitutional Political Economy thus uses the descriptive theories of Public Choice to make prescriptive recommendations.

Public Choice and Constitutional Political Economy both emphasize the importance of rules for understanding and constraining government. First, consider the argument made by Milton Friedman and F. A. Hayek, that the proper role of government in a free society is to play umpire by imparting fair, unbiased rules, such as enforcing contracts and prosecuting theft. The government’s role is not to interfere by playing the game or picking winners and losers. Instead, the government should implement impartial rules and let the outcome be whatever it will be. If the result of a sports contest appears unfair or not sufficiently entertaining, then the solution is to alter the game’s rules. For example, in 1961, the American Basketball League (ABL) introduced the three-point shot. The American Basketball Association (ABA) followed suit in 1967. Then, in 1979, the National Basketball Association (NBA) finally recognized the three-point shot. Instead of arbitrarily picking winners and losers to make the game more fair or entertaining, the basketball associations altered the rules to achieve that outcome. So too, Friedman and Hayek said, the government should impartially enforce market rules without deciding what should be produced at which prices in advance.

Similarly, constitutional political economists distinguish between the “game” and the “rules of the game” in studying political processes. If the government is not behaving the way it should, the solution is to alter its rules. The “game” is played at each level of government, while the “rules” are set one level above. For example, rules of bureaucrats and regulatory agencies are set by legislation, while the Constitution establishes the rules of legislators. Whenever a given level of government is not behaving as desired or intended, the solution is to alter the rules at the next highest level. In the words of economics Nobel laureate James M. Buchanan (1919-2013), policy analysts “should look to the structure within which political decisions are made.”

If Congress is to perceive the debt ceiling as a credibly binding constraint, then the ceiling must be set one level above Congress. The U.S. Constitution should be amended to restrict the ability of Congress to incur more debt.

One possibility is to embody the debt ceiling in a Constitutional amendment rather than an ordinary act of legislation as we have now. The debt ceiling would be essentially the same as it is today, except modifying it would require another amendment – which must be ratified by three-quarters of the 50 states, rather than legislation that passes a majority of Congress and is signed by the President. Congressional representatives would be more likely to treat the debt ceiling as a binding constraint because they would not be able to unilaterally modify the ceiling. Therefore, embodying the debt ceiling in an amendment to the Constitution is more likely to persuade members of Congress to avoid allowing the debt to approach the ceiling in the first place.

Alternatively, we could add a balanced budget amendment to the Constitution, similar to the balanced budget provisions in the constitutions of every US state except Vermont. A balanced budget requires that every year, expenditures do not exceed revenues. A balanced budget amendment is, therefore, equivalent to a ban on deficits and debt. Some states have particular variations on this theme. For example, Indiana prohibits state debt except for “temporary and casual deficits” for exceptional purposes. Most states permit debt for capital expenditures, such as transportation and other infrastructure. In theory, a balanced budget could be required every several years, rather than every single year, and all debts incurred would be paid in full by a certain year. Exceptions such as these would introduce flexibility, which may be desirable. For example, Keynesian macroeconomics prescribes deficit spending during recession years to be repaid by surpluses during boom years. A multi-year balanced budget amendment would therefore accommodate Keynesians. Even if one is not a Keynesian, it might be necessary to compromise with Keynesians to secure a balanced budget amendment.

However, it is important to realize that every exception creates the opportunity to exploit loopholes. Constraining government requires reducing the scope for discretionary behavior by imposing strict rules without exceptions. Therefore, any exceptions made to a balanced budget amendment should be carefully considered. With any power, we should always think, “How might the most self-interested person exploit the exceptions to this rule for their benefit, in ways which we did not intend?” Rules should be designed to govern people at their worst, not at their best. If all government officials behaved in a trustworthy and benevolent fashion all the time, then no constitution or rules would be necessary at all. It is precisely because government officials abuse their discretionary authority that they must be constrained by rules which limit the scope for discretion. As Thomas Jefferson said, “In questions of power, let no more be heard of confidence in man, but bind him down from mischief by the chains of the constitution.”

The point, in any case, is that one way or another, some binding constraint on the debt should be embodied within the US Constitution so that the government cannot unilaterally alter the debt limit. By requiring the consent of three-quarters of the states to change the debt limit through the formal constitutional amendment process, every member of Congress will know they cannot act as if the debt limit will always be increased whenever they want. Only then will Congress be likely to respect the debt limit.

Reprinted from Northwood University

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