Carney: Defend the Debt Ceiling!

Now that the debt ceiling is once again provoking howls of outrage and squeals of dread, it’s worth remembering why we have it and the good that it does.

The short answer: the debt ceiling ensures that bills, notes, and bonds issued by our government really is backed by the full faith and credit of the United States under the constitution.

Our stating place, as usual, is the Constitution of the United States. The constitution authorizes just one branch to borrow money on behalf of the U.S. government.

Section Eight of Article I of the constitution spells out that:

The Congress shall have Power   To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;

To borrow Money on the credit of the United States

What this means is that borrowings on behalf of the U.S. government need to be authorized by Congress. The Treasury cannot decide to borrow simply because revenue falls short of spending authorization. In the same way, Treasury cannot impose higher tax rates just because spending exceeds revenue. Nor can Treasury authorize spending for the common defense or general welfare just because expected expenses exceed what Congress authorized.

Each of these things is a Congressional power that requires explicit and particular Congressional authorization.

There’s very good reason for this. Authorization of debt by the legislature guarantees to creditors that the people of the United States stand behind the paper issued. This leaves no room for doubt that the debt is a legal obligation of the U.S. government. Debt issued without Congressional approval would be subject to such doubts and would be at risk of Congressional repudiation.

If that sounds far-fetched, ask yourself: Is it imaginable that a Democratic Congress might decide not to pay a debt issued unilaterally by Donald Trump to Jared Kushner?

As a practical matter, this means is that the borrowing costs of the U.S. government are lower because we have a mechanism—the debt ceiling—that makes our bonds less subject to challenge.

The notion of who was authorized to borrow money was very important to the Framers of the U.S. Constitution. Legislative control over debt was one of the provisions carried over from the Articles of Confederation.  When Alexander Hamilton, our first Treasury Secretary, wanted the United States to assume all of thee war debts of the states and fund these with new federal debt, he sought Congressional approval for the new issuance. He even sought Congressional approval for the specific rate of interest on the new bonds.

The history that followed is instructive. Here’s how I described it for CNBC back in 2011:

Prior to 1917, Congress had to approve each individual issuance of US debt. This power was rarely used. The first post-constitutional issuance of national debt was undertaken to pay for the War of 1812. The next time the US government went to the debt markets was during the depression of 1837-1843. In these issuances, further votes of Congress were required to authorize the government to make principal and interest payments as they became due.

It wasn’t until the Mexican War in 1847 that Congress first authorized the US Treasury to issue debt on which interest and principal payments were automatically approved. The real debt explosion, however, occurred during the Civil War—when the national debt ballooned to $2.75 billion from just $58.5 million. But even during the Civil War, the specific kind of debt issued by the US Treasury had to be approved by Congress. Both the terms of the debt and the interests rates to be paid were subject to the approval of Congress.

It was the First World War that undid Congressional micro-management of the debt. For the first time, in 1917, Congress passed a law that allowed the Treasury Secretary to borrow amounts up to a certain limit without having to get approval for each issuance. Nonetheless, Congress was, at this point, still dictating limits for various types of debt: $4 billion for war-savings certificates, $4 billion for certificates of indebebtness, and later, another $7 billion in Treasury notes.

During the Great Depression and WWII, Congress delegated even more of its borrowing power to the Treasury, adopting a single debt ceiling over the various ceilings for types of borrowing that had been adopted during WWI and its aftermath. The Treasury Secretary was now free to borrow up to the Congressionally set limit in whatever form he thought most appropriate given market conditions. That is the system, more or less, we’re still operating under.

There are at least two other important features of the debt ceiling. First, by forcing Congress to openly authorize debt, it allows the public to hold their lawmakers accountable for their decisions. If the public thinks that the debt ceiling should have been maintained or lifted, they can reference the votes of their Senators and Congressmen to determine which they voted. Lawmakers are forced to standby their decisions to spend in a very public manner.

Second, the debt ceiling reminds us that government spending is not free. Whether we offset spending with taxes or with bond issuances, government spending is a claim on the resources of the nation. It leaves less in the hands of the public sector. So even if debt issuance might not technically be necessary to finance spending, as the advocates of Modern Monetary Theory claim, debt issuance and limits upon that issuance serve as useful checks on the temptation to overspend.

This is one of the main reasons the debt ceiling is so despised by the left: they hate the check it provides on spending. They would like the shelter of unchecked borrowing, of borrowing that required no vote by Congress other than the omnibus appropriations bills. They despise the sunlight shed on the government’s claims on our nation’s resources by the window of the debt limit.

It is often said that Congress has implicitly authorized borrowing because it authorized spending. But that’s not the way the constitution works. It would make as much sense to argue that Congress implicitly authorized tax hikes. Or that Congress had implicitly authorized tax cuts when spending falls short and a surplus arises. Our Constitution agitates at every turn against the implicit authorization of government action. It requires that each power be executed explicitly so that rule by the people can be preserved.

The debt ceiling is not perfect, but it is more perfect than the currently available alternatives. And that will do for now.