Whenever the debt ceiling creeps back into the news, Smart People start talking about how ridiculous the whole thing is and why it should be completely abolished. Congress already approved the legislation that led to increasing the debt, so why should they get a chance to play dangerous political games around actually allowing it to be increased? As Bill Clinton says, “The idea that the Congress gets to vote twice on whether to pay for [expenditures] it has appropriated is crazy.”
It may be a crazy idea, but I also think it’s an awesome and insanely useful idea. Yes, in theory, it’s a redundant step, but the actual practice is far from the theory – a point Smart People should recognize, as many of them like to make the same criticism of libertarian theories. In practice, the debt ceiling gives Congress a chance to rethink the policies it already approved that led to this debt.
That point has been made more eloquently by others, but I feel like a lot of people don’t appreciate just how powerful of a trick the debt ceiling can be, if you’re concerned about deficit reduction. You might not understand this if you’ve never been in a financial position where you had to trick yourself in order to save money or cut your own spending.
People in this position may decide to wait 24 hours before purchasing something that is over a set limit. They may decide to take out a limited amount of cash for certain types of purchases, and only use cash for those purchases, to prevent themselves from spending a greater amount. If they run out of cash, there are no external forces preventing them from going to the bank or an ATM to get more, but that deliberately-placed hurdle may give them the marginal incentive to avoid crossing it or to commit to changing personal spending policies to avoid crossing it again in the future.
The basic idea is that people are naturally inconsistent. Someone may want to save money without wanting to reduce his spending or increase his income. In some ways, he could be described as a hypocrite, but if he decides that his desire to save money is most important, he can take steps to encourage or force himself to reduce his spending.
If individuals are inconsistent, then the aggregate American people – and the Congress that represents them – most certainly are. There is no greater example of a body that wants to save money without reducing spending or increasing income! So what greater use could there be for a trick that forces this body to confront its own hypocrisy?
Furthermore, the debt ceiling doesn’t quite equate to a “second” vote anyway. Yes, Congress already approved the legislation that got us here, but we all know that programs can end up costing far more than originally estimated. The debt ceiling helps account for that, too.
I know, I know, Keynesians claim there’s no need to reduce spending and that hitting the debt ceiling would be catastrophic. I can appreciate a Pascallian uncertainty argument that it’s not worth the chance, but I am unconvinced it would be disastrous. After all, these folks have been warning of disastrous consequences for awhile now.
Last year’s debt ceiling battle was supposed to hurt the economy and make investors more nervous about our bonds. I don’t think there’s any evidence that it hurt the economy, and Treasury rates have only gone further down. This year, Fiscalcliffmongerers warned of further damage from the uncertainty – well, there’s still no deal but the sky hasn’t fallen in yet and Americans still spent billions on Christmas. I’m starting to become as skeptical of the alarming Keynesians on my (far) left as I am of the hyper-inflationary Austrians on my (near) right.
I don’t expect the debt ceiling to not actually be raised, anyway. Any spending cuts that can be extracted for it is just icing on the cake. Last year’s debacle actually almost kinda sorta might lead to a real net reduction in spending of a few measly billion dollars from last year to this year!
In Milton Friedman’s preface to Capitalism and Freedom, he talks about the “tyranny of the status quo” and how “only a crisis…produces real change.” I am coming to believe that as bickering politicians continue to seem unable to make small, efficient changes to the budget. Maybe, just maybe, a tool like the debt ceiling will trick them into submission. Or maybe not. But for now, I can hope.