Economics, Taxes and Spending

We hit the debt limit again. Shall we take the bad or good way out?

Image Credit: Shutterstock

Image Credit: Shutterstock

On Sunday, the US hit the debt limit, triggering the Treasury to engage in “extraordinary measures” to keep the government paying its bills.

The ensuing debate could go one of two ways. We saw the bad way in August 2011. Congress held the debt limit for ransom in exchange for deficit reduction. Markets went haywire. US debt was downgraded for the first time. The Left got some tax hikes. The Right got some discretionary spending cuts. Serious budgetary issues, such as entitlements, went unaddressed.

There is a good way.  The US could back its obligations without fear of default.  Markets could rise with confidence that the political process works. The US could reform entitlements, the real driver of our deficit ten years out. It’s within reach. So how do we get there?

AEI scholars have written extensively about how to approach the debt limit. Their recommendations include reforming the debt limit itself and undertaking entitlement and tax reform. A selection of AEI’s work on the issue is below.

• “The open threats now by Senate Minority Leader Mitch McConnell, R-Ky., and Boehner that they will hold the debt limit hostage yet again, to demand more and deeper discretionary spending cuts (McConnell) and the repeal of Obamacare (Boehner) is a formula for disaster…” Norman Ornstein.

• “Moving forward, it is important for the US Congress to take yes for an answer to the question of whether it has already achieved substantial deficit reduction. Perhaps by accident, Congress has in fact reduced the US budget deficit by enough to enable working at long-term fiscal reform, including the aforementioned reform of the tax and entitlement systems over the next year.” John Makin.

• “Quite simply, the debt limit as currently constructed is practically meaningless. The debt it caps includes both the massive borrowing that our federal government has undertaken, and trillions of dollars of intragovernmental debt–the latter of which accrues when a federal program borrows from another federal program’s surpluses. By commingling these obligations under one limit, the government has created confusion and clutter, not clarity or transparency… “ Alex Brill and Colin Hanna.

• By changing the debt limit definition to focus on the debt that matters–debt held by the public–Congress could send a message to financial markets that lawmakers are truly concerned about runaway deficits and out-of-control spending.” Alex Brill.

• “We have had endgame negotiations of this sort many times before, and game playing and posturing by partisans, with their positions, votes and rhetoric changing depending on which party controlled the White House….What is different now? First is that for the first time, ostensibly credible opinion leaders are making a case that breaching the debt limit is no big deal.” Norman Ornstein.

The choice is in Congress’ hands. And they best decide soon. Extraordinary measures will run out come Labor Day, Treasury Secretary Jack Lew told Congress last week.

Plenty of people will advocate for the ‘bad way’ out as if there’s no other option. But there is. Congress’ challenge: use the debt limit debate to actually help the economy.

Follow all of AEI’s economics team on Twitter @AEIecon, and sign up for the LEDGER – A weekly snapshot of news, views, and economic cues from AEI’s Economic Policy Team

One thought on “We hit the debt limit again. Shall we take the bad or good way out?

  1. Our biggest economic problem is the debt. Any so-called solution that continues borrowing AND does not begin paying down the debt is not a solution but simply more of the same thing that created the problem.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>