Even if the White House and congressional leaders reach a deal to raise the debt limit, they face at least two hurdles to persuading rank-and-file Republicans to go along. Some cling to a disturbing belief that the Treasury Department doesn't need to borrow more money to keep America's creditors happy. And many more insist that the deal must include a constitutional amendment to require a balanced budget. The former notion is irrational. And the latter is bad policy, even if it reflects a legitimate concern about the financial burden on future generations.
The statutory debt ceiling limits the amount of money the Treasury Department can borrow from the public, which it does by selling bonds. The government hit the $14.3-trillion debt limit in May, forcing the department to borrow from federal pension funds and use other accounting gimmicks to pay the bills. But because Washington is running such an enormous deficit — through June, it was borrowing 36 cents of every dollar it spent — Treasury Secretary Timothy F. Geithner has warned that the government will run short of cash after Aug. 2.
Geithner, President Obama and Federal Reserve Chairman Ben S. Bernanke have declared that not raising the debt ceiling would be devastating, sending shockwaves through the global credit markets and raising interest rates for millions of borrowers. A faction in Congress aligned with the "tea party" movement dismisses the fiscal doomsayers, however, arguing that there's no risk of default because monthly tax receipts far exceed the amount needed to continue paying the interest on the federal debt.
That's true, but it's akin to arguing that you could survive just fine if you paid your mortgage every month but stiffed the gas company, MasterCard and your babysitter in order to do so. Unless it can borrow more, the Treasury Department would have to stop paying for more than a third of Washington's expenses — with the administration left to decide where to cut. Obama drew rebukes for suggesting that Social Security checks might be affected; should he stop paying air traffic controllers instead?
Not raising the debt limit would send an unmistakable message to the public that Congress cannot be counted on to hold up its end of a bargain. That point was underlined this week by a Standard and Poor's executive, who told lawmakers that S&P may downgrade the government's credit rating if the Treasury Department pays bondholders but not other creditors. Investors would then demand higher interest rates, driving up U.S. borrowing costs and the deficit.
The demand for a balanced-budget amendment is motivated by a more sweeping and pernicious distrust of lawmakers and the political process. Advocates argue that the only way to stop Congress from spending the country into oblivion is to require a balanced budget each year unless Congress can muster a supermajority to approve deficit spending. Recent history shows that they have a point: Deficits balloon when the economy is struggling, and when the economy is good, lawmakers rush to cut taxes instead of paying down debt or creating emergency reserves. Making matters worse, seemingly every federal program and subsidy is defended by a phalanx of interest groups that benefit from the largesse.
Such concerns have been around for decades, as has the idea of amending the Constitution to require a balanced budget. But lawmakers have refused to slap procedural handcuffs on themselves and future Congresses for at least two very good reasons. First, deficit spending isn't necessarily harmful, and it can help steady the economy during a downturn or a crisis. It's problematic only when the deficits are so large that the national debt grows faster than the economy. And second, requiring a two-thirds vote to run even a negligible deficit would lead to legislative gridlock and give too much power to political minorities with an agenda, as California has demonstrated repeatedly.
The amendment being sought by Republicans has several troubling new features. For starters, it would require a two-thirds vote for any increase in revenue.Lawmakers already pay a high political price for supporting higher taxes; that's enough of a disincentive. The GOP proposal would not only help special interests preserve unwarranted tax breaks, it would discourage lawmakers who want to create programs from including a way to pay for them.
The amendment would also require a two-thirds vote to spend more than 18% of the previous year's gross domestic product, roughly the level of spending during peacetime in the 20th century. But the U.S. population today is older, and its healthcare expenses are many times greater. Within a few decades, according to Congressional Budget Office projections, an 18% cap would leave no room for anything but Social Security, Medicare, Medicaid and interest payments on the debt.
Those projections provide ample reason for Congress and the White House to agree to cut spending, subsidies and tax breaks enough over the next few years to stop the national debt from growing faster than the economy. A host of bipartisan commissions have offered plans that could achieve that goal; none of them, however, have called for a balanced-budget amendment. And if the fight over the amendment stops Congress from raising the debt ceiling on time, it will only serve to make the country's fiscal problems worse.