Tim Geithner’s Bad Idea on the Debt Ceiling
Treasury Secretary Tim Geithner wants to defang the debt ceiling.
Here's how Geithner's proposal is explained in the New York Times:
"To ensure that there are no more crises like last year's impasse, Mr. Geithner proposed permanently ending Congressional purview over the federal borrowing limit, Republican aides said. He said that Congress could be allowed to pass a resolution blocking an increase in the debt limit, but that the president would be able to veto that resolution. Only if two-thirds of lawmakers overrode that veto could Congress block a higher borrowing limit."
This will surely win Geithner plaudits from pundits. Almost unanimously, the smart economic and market commentators hate the debt ceiling. They regard it as a dangerous archaism, a relic with no good purpose in modern politics.
Take, for example, Joe Weisenthal's reaction to the Geithner proposal: "Nailed it. This almost completely prevents a debt ceiling crisis ever again, while keeping the ceremonial aspect that people like."
This assumes that we don't want a debt ceiling crisis to happen ever again. Which is wrong: we need the occasional debt ceiling crisis. It keeps us healthy.
The debt ceiling keeps us healthy the same way that working out makes you stronger. It takes genuine stress to force muscles to develop. No pain, no gain, as they say. The pain experienced in lifting heavy weights is experienced as discomfort but avoiding it only promotes weakness. Weakness, of course, grows without the sudden stressors that strength requires.
The pain inflicted by the debt ceiling works the same way. It forces us to have a real debate about the level of overall government spending, government taxing and government borrowing—a debate often masked by discussions about the benefits or costs of individual problems. Reducing the debt ceiling to a ceremonial event would be like trying to gain strength by lifting barbells with balloons on their ends.
Nassim Taleb's way of thinking about suppressed volatility is useful here.
"Deprive your bones of stress and they become brittle. This denial of the antifragility of living or complex systems is the costliest mistake that we have made in modern times. Stifling natural fluctuations masks real problems, causing the explosions to be both delayed and more intense when they do take place. As with the flammable material accumulating on the forest floor in the absence of forest fires, problems hide in the absence of stressors, and the resulting cumulative harm can take on tragic proportions."
There's also another important point to be made in favor of the debt ceiling: it is probably required by the Constitution. Article One of the Constitution assigns to authority to "borrow Money on the credit of the United States" to Congress. Modern constitutional interpreters, especially those who sit on federal courts, tend to give Congress a lot of leeway when it comes to delegating its assigned duties. But even this leeway has its limits.
The current arrangement for issuing debt, which originated during the Great Depression, is probably at that limit. The issuance of debt is largely delegated to the Treasury, with Congress just setting the upper limit of the debt. Further delegation of this legislative power to the executive is probably unconstitutional. (For more on the history of debt issuance, see here.)
This is not just a fetishization of the Constitution. Even if we were starting from scratch, we'd want to incorporate a requirement for Congressional approval of debt issuance. Congressional approval makes defaulting on debt far less likely than it would be if the executive branch could issue debt on its own. Debt holders can rely on the fact that the debt really is backed by the full faith and credit of the United States, something that would be in doubt if Congress did not have to approve the debt level. Because of the debt ceiling vote, the debt is never just the "Obama's debt"—it's debt that the people's house approved.
The debt ceiling also holds Congress accountable. If raising the ceiling were left to the President, more and more Congressmen would vote against raising it because a vote against would be cost free. What lawmaker wouldn't want to cast a purely symbolic vote for "fiscal responsibility?" The current arrangement makes this vote count for something, which means that lawmakers must seriously consider the costs and benefits of their position on the ceiling.
Finally, it is worth remembering that payments on the debt must be authorized by Congressional acts. Absent a debt ceiling, Congress would find itself asked to authorize payment on debt it had not approved. Under Geithner's proposal, the debt ceiling could be raised against the wishes of a majority of lawmakers. This majority, however, could still vote against the authorization of payment on debt. The very threat of a payment default vote would be far more unstabilizing than the debt ceiling debate has ever been.
I get the feeling that a lot of critics of the debt ceiling just don't understand it. They're like the walker in "Mending Wall," Robert Frost's poem who comes across a wall between farms but can't understand the reason it is there. Before kicking over the wall, it's at least worth investigating the reason someone thought it was worth putting up in the first place.
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