Treasury Secretary Timothy Geithner listens to opening remarks at a hearing… (Jonathan Ernst, Reuters )
Under normal circumstances, there's nothing wrong with symbols. They communicate information nonverbally, provide rallying points for popular movements, give tangible form to abstract concepts.
But when a symbol becomes a fetish, you have trouble.
Consider one wholly artificial symbol currently making waves in Washington: the federal debt limit.
Under current law, the U.S. government is permitted to have no more than $14.294 trillion in debt outstanding. We're almost there. At the end of February, there was about $99 billion in headroom left; in 2010, when the federal budget was about $3.7 trillion, that was the equivalent of roughly 14 minutes of government spending.
Sometime between the middle of April and the end of May, according to the Treasury Department, that borrowing headroom will run out. If Congress doesn't vote by then to raise the statutory limit, the Treasury will start implementing a series of dire steps to stave off default on existing bonds and other obligations.
As happens almost every time the debt limit draws near — it's almost an annual event, and sometimes semiannual — there is currently an outbreak of posturing by fringe elements in Congress over whether to raise the limit.
Some members are exploiting the impending vote as an opportunity to cut a deal for draconian federal budget cutbacks or structural changes, like an agreement on a constitutional amendment mandating a balanced budget. It's a fair bet that, given the tea-partyish tone of the fiscal debate in Washington this year, the brinkmanship over the debt limit will be brinkier than ever.
The debt limit's fans contend that it forces us periodically to take fiscal stock. It's proper to ask instead: Why do we have this thing in the first place?
Let's detour briefly to the consequences of hitting the debt limit. The disasters start accumulating immediately.
If the government defaults on its bonds by missing a payment, its cost of borrowing would instantly rise, placing a further burden on the budget and cratering the value of Treasury securities held by individuals, pension funds and sovereign nations.
Interest rates would rise for all forms of debt — mortgages, credit cards, state and local borrowing.
The safe-haven stature of T-bonds and the dollar would be deeply impaired, imposing further costs. Government output of Social Security checks, tax refunds, Medicare reimbursements, military salaries and more would be reduced or halted.
"A default would impose a substantial tax on all Americans," Treasury Secretary Timothy F. Geithner warned Congress in January, underscoring that "any default is unthinkable and must be avoided … so that the full faith and credit of the United States is not called into question."
The steps available to the Treasury to stave off default will work for at most a couple of months. And they may not come cheap. When the debt limit kicked in for three months in 2003, the government called in some bonds held by a civil service retirement fund early, costing the fund and its members more than $1 billion in lost interest.
The funny thing about Geithner's warning to Congress is that it was completely unnecessary. Nobody in Washington disputes these consequences. In fact, nobody expects them to happen because everybody assumes that Congress will increase the debt limit, in good time.
"If you want to pull financial aid for 9 million college students in the middle of the school year and risk tens of thousands of them dropping out, you're not saving money — instead you are jeopardizing the preparedness of the workforce for the next generation," said Austan Goolsbee, chairman of President Obama's Council of Economic Advisors and a member of the Cabinet.
The debt limit was first enacted in 1917. The idea then was to give the Treasury more freedom to issue debt, not less; since otherwise Congress would have to hold a vote on every bond issue, it was deemed easier to give Treasury blanket authority, but not unlimited authority.
By the 1960s, the limit became a constraint. Since 1962, Congress has changed it at least 74 times. Perversely, the debt limit acquired the reputation of a brake on fiscal irresponsibility. But that's plainly a fantasy. The debt limit doesn't keep Congress from enacting any spending bills it desires, along with tax breaks, creating deficits that have to be closed with debt.
The debt limit has been treated with abandon by Republican and Democratic presidents and Congresses. Under George W. Bush it was raised seven times, including twice in 2008, by a total of $5.4 trillion. Under Obama it was raised twice in 2009 and again last year, by about $2.9 trillion overall.