WHY CONGRESS MUST NOW ABOLISH ITS DEBT LIMIT / THE FINANCIAL TIMES COMMENTARY & ANALYSIS ( RECOMMENDED READING )

Why Congress must now abolish its debt limit

By Bruce Bartlett

Published: October 22 2009 20:49

Any day now there is going to be a uniquely American political crisis when Congress must raise the limit on how much the federal government may borrow. If it fails to do so, the Treasury department loses the legal authority to issue new bonds.

One peculiarity of the debt limit is that it applies to the gross federal debt, much of which is held by the government itself. That is principally because revenue from the social security tax is greater than is needed to pay current social security benefits. By law, the excess revenue is invested in special Treasury securities.

As of October 19, the gross debt equalled $11,952,611,405,769.02. ($11,953bn). The figure is updated daily on the website of the Treasury’s Bureau of the Public Debt. Of this, $4,400bn was held in government accounts and $7,500bn by the public. The public includes the Federal Reserve even though it is a government agency. That is because the Treasury is prohibited by law from selling securities directly to the Fed, which buys them on the open market.

The current debt limit is $12,104bn, a figure set in February as part of the stimulus package. Normally, a $150bn cushion would be enough to last for half a year or more. But with a budget deficit estimated at $1,400bn in fiscal year 2010, which began on Oct 1, it is only going to last a few more weeks.

Some years ago, the House of Representatives established a sort of automatic mechanism for raising the debt limit and has voted to raise it to $13,000bn. But the Senate has not yet done so. If it simply endorses the House measure the legislation would go straight to the president for his signature; if not, a conference would have to be held, and both the House and Senate would have to vote again.

Since the debt limit is “must pass” legislation, it often becomes a vehicle for extraneous measures that would be vetoed by the president if presented to him as a stand-alone bill. More importantly, it is always an opportunity for the party not in power to stir up debate about debt.

“The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure,” then-Senator Barack Obama thundered on March 16, 2006. “Increasing America’s debt weakens us domestically and internationally. Leadership means that ‘the buck stops here’. Instead, Washington is shifting the burden of bad choices today on to the backs of our children and grandchildren.”

Mr Obama voted against raising the debt limit that day and will, no doubt, be reminded of this fact by Republicans in coming weeks. But everyone knows the debt limit will be increased after Republicans extract their pound of flesh by making the administration – and financial markets – sweat a bit.

It is possible that the debt limit may be breached temporarily if Congress does not act in a timely manner. The Treasury can temporarily delay buying new bonds by using social security’s excess cash but Republicans will scream that the social security trust fund is being raided. However, in 2002 a Republican administration engaged in a similar manoeuvre.

There may once have been value in forcing Congress to occasionally focus on the debt and think about its implications before raising the debt limit. But in 1974, it enacted a budget law that forces it to deal with the budget as a whole on a yearly basis, rather than limiting its attention to individual appropriations bills. Since then the limit has been superfluous.

Defenders of the debt limit argue that it imposes a constraint on borrowing and, hence, the growth of government. But there is zero evidence of this. Brian Roseboro, assistant secretary of the Treasury under President George W. Bush, has said that the idea that the debt limit restrains spending is the worst myth he knows: “The plain truth is that the debt limit does not affect the deficits or surpluses; the critical revenue and spending decisions are made during the congressional budget process.”

Unfortunately, all the political theatre over the limit often has a cost. Mr Roseboro points to cases when delays in borrowing cost taxpayers tens of millions of dollars in higher interest costs. It also led to higher interest rates, forcing private borrowers to suffer. It is long overdue for Congress to abolish the debt limit, as was recommended in 2003 by Alan Greenspan, the Fed chairman, who said it was either redundant or inconsistent with the goals Congress sets in its budget.

The writer’s latest book is ‘The New American Economy: The Failure of Reaganomics and a New Way Forward’

Copyright The Financial Times Limited 2009.