Phase in Debt Limit


Everyone in Washington, D.C. knows two things:

1. President Obama will try to wriggle out of any spending cuts enumerated in the fiscal cliff deal. We all know from experience that whenever there is a one-to-one ratio between spending cuts and revenue increases the ratio falls apart in reality. The tax increases slow the economy, curtailing growth and increasing entitlement spending. Unless there is an enforcement mechanism, spending goes up, not down.

2. The Republicans will not refuse to raise the debt limit and thus cause the nation to default. If House Speaker John Boehner did not let the government shut down over the 2011 continuing resolution battle or the subsequent debt limit fight, he won’t let it close down now.

So, as things now stand, any leverage the Republicans get from the debt limit fight is purely theoretical and not real.

Here’s how to make it real:

The Republicans should offer to pass a bill setting a debt limit that rises each quarter pegged to one-third of the revenue growth of the preceding quarter. Thus, two-thirds of all revenue growth — natural or due to tax hikes — would go to deficit reduction.

Republicans are unwilling to pull the trigger on default by refusing to raise the debt limit. But a bill to allow gradual increases in the debt limit, at a pace slower than revenue growth, need not trigger default. Instead, the president would be forced to prioritize his spending and borrowing so as to avoid default, pay the military and send out Social Security checks. All the rhetorical handles he has to battle an effort to kill the debt limit increase will be gone in the face of a phased in debt limit hike.

A spending deal with deficit reduction targets really cannot be enforced. But if those goals are linked to the debt limit, they are self-enforcing.

Obama wants to not only raise the debt limit but to eliminate it. Without a debt limit, there is no way to stop or even to slow government borrowing. The two normal constraints on public debt growth are not applicable. For other borrowers, lenders can refuse to lend. But the federal government is not planning to borrow from lenders. It will borrow the money it prints and gives to banks in return for worthless mortgage backed securities. And, in usual circumstances, the interest rate rises as the debt becomes larger and less sustainable. But with the fund for debt service coming from the federal printing press, the Treasury can hold the interest rates to an artificial level of 3.5 percent as at present.

It is only through debt limits that there is any check on federal borrowing or, even on federal spending. We need to cut off the credit card Washington uses to pay its bills.

But the all-or-nothing approach of current debt limit brinksmanship leaves false draconian choices for both the president and the Congress and, of course, rattles the markets. But if the debt limit is slated to go up enough to meet debt service and other vital needs, but not enough to give the president all the money he wants, it can be a real check on executive profligacy.

The Republicans need a financial equivalent of the flexible response doctrine Kennedy brought to U.S. defense, rejecting the massive retaliation doctrine of Eisenhower as too drastic ever to really be used. If the only option is the nuclear, then there is no option.

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