Opinion: Columnists

Don't fear the debt limit

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Whenever the establishment left and right agrees on something, expect a big assault on our democracy. That is the case with the emerging consensus that the debt ceiling should be rescinded as part of the "fiscal cliff" negotiations so that spending hawks can't later hold the economy hostage to extract spending cuts. But there are few external market checks on America's profligacy. Without strong internal political checks, it might well spend itself into oblivion.

America's total $16 trillion accumulated debt represents 100 percent of the nation's gross domestic product. Add in its $85-plus trillion in unfunded pension and health care liabilities, and the debt shoots up to 550 percent -- only marginally better than France's. Every man, woman and child in America is currently on the hook for $190,000.

But the Obama administration obviously doesn't give a hoot. Otherwise, its plan to avert the fiscal cliff would have included serious spending cuts and entitlement reform, not a scheme to raise taxes on households making more than $250,000, which would at best raise about $40 billion per year -- around what Washington borrows every week.

As if that were not outrageous enough, the administration also demanded that Congress forever forfeit its constitutionally given debt authority. After initially laughing at the suggestion, House Speaker John Boehner is now mulling giving up that authority for a few years in exchange for ... well, it's not clear yet!

None of this is surprising to anyone listening to smart-set liberals and conservatives lately.

Liberals have been railing against the ceiling ever since fiscal hawks used it to create a spending showdown last year. They argue that separating the budgeting and the borrowing functions of Congress means that Congress can authorize spending but then refuse to sanction the means to pay for it. "The idea that the Congress gets to vote twice on whether to pay for [expenditures] it has appropriated is crazy," insists Bill Clinton.

Liberals want America to follow other developed countries, where legislators are required to approve new borrowing as part of the budgetary process.

What they ignore is that many of these countries have hard limits on debt issuance as part of the budgetary process -- kind of like a balanced-budget amendment, which liberals resolutely oppose. For example, Germany has a constitutional amendment that requires that structural deficits not exceed 0.35 percent of GDP.

What's more, that's effectively how things worked in America until Democrats decided three years ago that passing budgets was a dispensable nicety and started authorizing spending through ad hoc resolutions. This meant they did not need to negotiate or set spending priorities to get a majority buy-in, a process that made raising the borrowing limit a fait accompli. But eliminating the ceiling in the absence of budgets is tantamount to giving Democrats a blank check and then gagging opponents from raising questions.

But liberals aren't the only ones questioning the debt ceiling. Writing for the American, a magazine of the conservative American Enterprise Institute, Steve Conover notes that the possibility of America defaulting undermines investor confidence in America's sovereign debt instruments, something that could raise borrowing costs and hurt growth.

That strains credulity.

For starters, not raising the borrowing limit doesn't mean default. America's annual debt service costs are only about 10 percent of federal revenues, which means that the country can easily pay investors, meet its obligations to its retirees (for now) and still have money left. It would certainly mean cutting spending somewhere, but that's a prospect to be cheered, not lamented.

Furthermore, America has experienced an epic financial meltdown, sluggish growth and is up to its eyeballs in debt, and credit markets are still offering it loans at effectively zero percent interest rates. It makes no sense that a little budget fight to put America on sounder fiscal footing would cause them to significantly jack up these rates.

But one reason credit markets have ignored America's spending addiction is that, with Europe on the verge of meltdown, they have nowhere else to go. More importantly, the dollar's status as a reserve currency makes it much easier for America to issue debt without fearing commensurate interest hikes. In other words, America's superpower status has created an incentive for fiscal irresponsibility.

Even if a debt ceiling showdown causes some rate hikes, catastrophe wouldn't follow. The resulting budgetary strain might well prod legislators to deal with the deficit now -- forestalling a far uglier reckoning down the road.

Great powers fall not due to external threats but their own avarice. The existence of the debt ceiling suggests that America is aware of this -- weakening or scrapping it would be a terrible sign.

Washington Examiner Columnist Shikha Dalmia is a senior analyst at the Reason Foundation.

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