|PRINT | CLOSE WINDOW|
By AMITRAJEET A. BATABYAL
The Jan. 23, 2013, decision by the Republican-controlled House of Representatives to "suspend" the debt ceiling deadline till May has brought temporary relief to the business community and to markets more generally. The imminent fear that the United States would not be able to borrow the money it needs to pay its financial obligations has now receded, at least for a couple of months.
Readers will recall that in the summer of 2011, Republicans openly used the threat of default to extract concessions from a supposedly profligate President Barack Obama. This misguided attempt drove one credit ratings agency (Moody's) to strip the United States of its triple-A rating. This sort of serial sparring has led to a lot of political grandstanding, but it has produced little or no gain for our country. Given this state of affairs, it makes sense to ask whether we should continue to have a debt ceiling.
The debt ceiling is an anachronism. As the Economist has pointed out, until about a century ago, Congress authorized bond issues one at a time. From 1917 to 1941, Congress decided to consolidate these authorizations into a single debt ceiling. More recently, in 1974, lawmakers passed the Congressional Budget and Impoundment Control Act. This law required Congress to pass an annual budget and set deficit levels. A 1979 report from the Government Accountability Office pointed out that an implication of that law was that Congress would now have to consider the debt ceiling separately from the budget process.
Also in 1979, the influential Democratic congressman from Missouri, Richard Gephardt, proposed the so-called Gephardt rule. This rule set the debt ceiling to the level projected by the most recent budget resolution. As a practical matter, this rule allowed the debt ceiling to be raised without the need for a separate vote.
Until the arrival of Newt Gingrich in 1995 as the GOP Speaker of the House, the Gephardt rule worked well and there were no fights over the debt ceiling. However, in his zeal to remind Americans that we were getting into "serious" debt, Gingrich and likeminded Republicans decided to waive the Gephardt rule. Thus began the modern battles over the debt ceiling.
It is important to comprehend that Congress already has control over the nation's deficits because it sets tax and spending levels. It is simply unnecessary-and as we have seen, potentially dangerous-for our lawmakers to hold a separate vote to allow the U.S. government to finance those deficits. Therefore, it is no accident that three former Treasury secretaries-Robert Rubin, Larry Summers, Paul O'Neill-and current Treasury Secretary Tim Geithner all have opposed the debt ceiling, albeit with varying levels of intensity. In this regard, Alan Greenspan, the former chairman of the Federal Reserve, memorably claimed not to understand why lawmakers needed both belts and suspenders!
Default by the United States on its financial obligations, even if it is only for a few days, will cause turbulence in global financial markets that rely on Treasury securities in many transactions. This may even drive up interest rates significantly. Therefore, come May, if Republicans engage in another sparring contest over whether the United States ought to meet its financial obligations, they will strengthen the impression in the international community that the United States is untrustworthy.
Such an outcome ought to be unacceptable to all Americans. Therefore, let us make the debt ceiling a subject of inquiry by historians.
Amitrajeet A. Batabyal is the Arthur J. Gosnell professor of economics at Rochester Institute of Technology; these views are his own.2/1/13 (c) 2013 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email firstname.lastname@example.org.