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Scrap the debt limit, some lawmakers and economists say

Amid another battle over the limit, several House Democrats propose ending it. Many economists agree with the idea, but Republican leaders do not.

January 22, 2013|By Jim Puzzanghera and Don Lee, Los Angeles Times
  • Reps. Peter Welch (D-Vt.), left, Jerrold Nadler (D-N.Y.) and Jan Schakowsky (D-Ill.) hold a news conference on Capitol Hill to announce plans to introduce legislation to eliminate the federal debt ceiling.
Reps. Peter Welch (D-Vt.), left, Jerrold Nadler (D-N.Y.) and Jan Schakowsky… (J. Scott Applewhite, Associated…)

WASHINGTON — With the White House and Congress engaged in their second major battle in 18 months over the debt limit, some lawmakers, economists and analysts are offering a simple solution: Just get rid of it.

The U.S. is one of the few nations with such a borrowing mechanism. And as political fights over raising the limit have escalated in recent years, chilling financial markets and triggering the first-ever U.S. credit rating downgrade, critics said the time has come to make a change in Washington.

"Congress has gone from grandstanding on the debt ceiling to actual use of it as an economic weapon of mass destruction," Rep. Peter Welch (D-Vt.) said. "It's extremely dangerous."

Welch and several Democratic House colleagues last week proposed eliminating the debt limit, which has been in place since 1939, to avoid the risk of a default.

They're joined by a growing chorus of analysts who have called the U.S. debt limit "ridiculous," "screwy" and just plain "nuts."

QUIZ: Test your knowledge about the debt limit

"The debt ceiling is a dumb idea with no benefits and potentially catastrophic costs if ever used," Richard Thaler, a professor at the University of Chicago's Booth School of Business, wrote in response to a University of Chicago poll of economists released this month.

House Republican leaders, for now at least, want to put off a showdown. They have scheduled a vote for Wednesday on suspending the limit until mid-May. In effect, there would be no debt limit for four months.

The White House backed the short-term plan Tuesday, and House Republican leaders appeared confident that the measure would pass. Senate Majority Leader Harry Reid (D-Nev.) declined to say whether he would take up the bill, but indications were that the Senate would go along with the strategy.

The move would delay the looming threat of a default, but the broader debate over the debt limit and its role would continue to simmer.

In each year's budget, Congress decides how much money should be spent, which also determines how much must be borrowed to cover any shortfall in revenue. So Congress also must frequently increase the debt limit to allow for the borrowing.

The debt limit has been raised 76 times since 1962. It now stands at $16.4 trillion, a level the government will hit as early as mid-February.

The University of Chicago's survey of 38 academic economists found that 84% agreed that "a separate debt ceiling that has to be increased periodically creates unneeded uncertainty and can potentially lead to worse fiscal outcomes." Just 3% disagreed.

"It's a very unusual provision because in most countries, if they vote for a budget, they either have to borrow the money to pay for it or they have to raise taxes or cut someplace else," said Jacob Funk Kirkegaard, a senior fellow at the Peterson Institute for International Economics in Washington.

"Separating out the spending from the actual payment for the spending is just a reckless fiscal policy," Kirkegaard said.

Those sentiments were echoed last week by Fitch Ratings.

The company, one of three leading credit rating firms, called the debt limit "an ineffective and potentially dangerous mechanism for enforcing fiscal discipline." But a Fitch executive said the company was not taking a stand on whether the debt limit should be eliminated.

Still, most Republicans said the debt limit is a vital check on long-term government spending.

The Constitution gives Congress the power "to borrow money on the credit of the United States." And the frequent votes over raising the limit on how much can be borrowed offer "a moment of reflection to consider the policies that have led to the current debt" and consider ways to reduce its growth, the Senate Republican Policy Committee said.

"In the simplest of terms, the debt limit helps hold Washington accountable to hardworking taxpayers, who ultimately foot the bill for Washington's spending habits," Rep. Sam Johnson (R-Texas) said Tuesday during a House hearing on the issue.

In most countries, the government's ability to borrow generally comes with approval of the budget.

In Britain and New Zealand, for example, finance departments are given broad authority to borrow in a manner they consider "expedient for the purpose of promoting sound monetary conditions" or in the public interest, according to a review of other countries' budget processes by the U.S. Government Accountability Office.

Canada's Ministry of Finance is provided a fixed amount that it is authorized to borrow for the fiscal year, the GAO said. When necessary, the ministry can request increased borrowing authority from the executive branch of government.

Because of such policies, experts in foreign nations find the U.S. debt ceiling odd. Although they understand that it is meant to provide extra layers of checks and balances, "it doesn't make an awful lot of sense," said Paul Ashworth, a Canadian economist at Capital Economics.

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