Automatic Debt Limit Increases: A Fastrack to Fiscal Ruin

Rising debt levels fuel interest rate growth

Photo by Lode Lagrainge on Unsplash

Federal debt is too high and growing at an accelerating pace. Approaching the debt limit leads to contentious debates about a lack of fiscal responsibility in Congress. It is thus no surprise that legislators seek to avoid voting for the inevitable debt limit increases that are a symptom of chronic deficit spending.

Commentators have called on lawmakers to eliminate or circumvent the debt limit. They’ve found eager supporters in the Democratic House Budget Committee of this departed Congress. Several Republicans have also voiced support for making debt limit votes less politically painful, including Senator Mitch McConnell, whose proposal to allow the President to unilaterally raise the debt limit became known as the McConnell Rule. But automatic debt limit increases threaten to put the U.S. government on the fast track to fiscal ruin.

Several attempts at avoiding legislative debt limit increases have been proposed. Three of the most prominent approaches include:

• Eliminating the debt limit. David Dayen suggested in The American Prospect, Congress could raise the debt limit to “$5 quadrillion or $100 quintillion or Graham’s number….neutralizing the debt limit.” Others have argued that the Treasury could mint its own platinum coins at any denomination it chooses as a workaround to the debt limit. This idea became popularized as the trillion-dollar-coin proposal.

• Automatically raising the debt limit. At the beginning of the 116th Congress, the majority democratic House adopted a standing rule akin to the “Gephardt rule” that would provide for a spin-off joint resolution to suspend the debt limit whenever the House succeeded in adopting a budget resolution. The House budget resolution would thus double as a debt limit vote, automatically sending legislation to the Senate that allowed for increases to the debt limit through the end of the budget resolution’s fiscal year.

• Automatically raising the debt limit after proposed deficit reductions. A bipartisan group of 60 representatives sent a letter to House leaders in June of 2020 seeking “a process for establishing overall budgetary goals—such as debt-to-GDP targets—that would reduce debt-limit brinkmanship as long as the budget remains on a responsible path.” Since then, Reps. Scott Peters (D-CA) and Jodey Arrington (R-TX) introduced H.R. 6139, the Responsible Budgeting Act, which would generate spin-off legislation to increase the debt limit if Congress adopted a budget resolution that reduced debt to GDP by 5 percentage points at the end of the 10-year budget window. This is similar to the Gephardt rule, except it requires a certain fiscal goal be met by the congressional budget resolution and for it to be adopted by both chambers.

  There’s one more loophole: if Congress failed to adopt such a budget resolution, the President could unilaterally increase the debt limit (ala the McConnell Rule) after introducing a fiscal plan to meet the debt reduction targets. Congress would then have 30 days to vote against the debt limit increase. It’s also important to note that neither a congressional budget resolution nor a presidential deficit reduction proposal are self-executing. Congress would still need to pass separate deficit reduction legislation to enact any changes into law. A budget plan without execution won’t stop the growth in the debt.

Before heeding the siren song of debt limit deniers, we should first consider instances when debt limit debates have spurred meaningful fiscal debates. The debt limit presents Congress with a focused legislative opportunity to re-evaluate unsustainable deficit spending. Unlike budget debates which more often center around whether to spend more on defense or domestic priorities, the debt limit discussion shifts the focus toward the total size of current debt and its drivers. Debt is a means of shifting fiscal burdens into the future, harming the economic prospects of younger and future generations that don’t yet vote. As such, debt policy has been a divisive issue since the beginning of American government and debt limit measures are often informally or formally linked to reconciling fiscal issues. For example, the debt limit was recently linked to:

• The No Budget, No Pay Act of 2013, which required that both chambers of Congress pass their budget resolutions by mid-April, or members would have their pay withheld. The act resulted in the Senate passing its first budget in four years well before the deadline, demonstrating that incentives matter.

• The Budget Control Act of 2011, which forced a vote on a Balanced Budget Amendment (which failed), imposed discretionary spending limits through fiscal year 2021, and set up a bipartisan commission for deficit reduction (the so-called supercommittee also failed).

• The Statutory PAYGO Act of 2010, which included a budget process reform that reinstituted pay-as-you-go rules, requiring tax cuts and mandatory spending increases to be fully offset. According to the Committee for a Responsible Federal Budget: “Informally, the agreement to raise the debt ceiling also led to the creation of a National Commission on Fiscal Responsibility and Reform (also known as the Simpson-Bowles commission).” The commission proposal failed.

Is it plausible that Congress could be incentivized to pursue fiscal responsibility without a blunt tool such as the debt limit? And what should such an alternative pathway look like? Kurt Couchman argues that adopting budget targets that resemble the Swiss Debt Brake might work. He recommends an approach laid out in the Responsible Budget Targets Act (RBTA) proposed by Sen. Mike Braun (R-IN) and Rep. Tom Emmer (R-MN):

“The Emmer-Braun bill would set annual spending targets based on prior spending and adjusted for GDP growth, recent deficits or surpluses, and changes to revenue. It would allow immediate emergency spending while requiring offsets in subsequent fiscal years. It’s a neutral rule that would phase out primary deficits (excluding interest) while letting the normal political process determine the precise mix of spending restraint and revenue. …The desire to avoid a debt limit fight and possibly accidental default would encourage Congress to stay on target. Even if the budget gets off track, what’s needed to get back on would be clear.”

I’ve long been a fan of the Swiss Debt Brake. The budget targets approach in the RBTA is promising, assuming it reflected a bipartisan commitment to fiscal responsibility and was paired with effective enforcement mechanisms. In the meantime, the debt limit, while far from perfect, is nevertheless a powerful tool to force Congress to confront rising federal debt and debate measures to reduce deficit spending. In the absence of a more effective tool, we’d be wise not to let Congress squander it.

Reading Rec’s and Fiscal Facts

• Rising debt levels drive up interest rates. The American Enterprise Institute’s John Mantus and Mark Warshawsky found that a “1 percentage point increase in the federal debt-to-GDP ratio is associated with an increase of nearly five basis points in the long-term interest rate.” The larger effect is “double what the CBO uses in its budget projections” which the authors attribute to their more complete specification of Federal Reserve policy. Under the AEI model, the “debt-to-GDP ratio rises to 235 percent in 2052” compared to the 185 percent forecast in the CBO extended baseline.

• U.S. watchdogs guarding $5 trillion in COVID aid request more money. The Washington Post’s Tony Romm and Yeganeh Torbati report that “persistent neglect has hamstrung the country’s last defense against waste, fraud and abuse — and raised the potential that Washington might not learn from its mistakes before the next crisis.” Mismanagement of funds is also worsening with the growth in emergency spending. Rachel Greszler recently highlighted that the federal government wasted $279 billion on improper payments in 2021 alone—that’s $2,000 per U.S. household.

• Senate to probe Social Security watchdog division. The bipartisan inquiry is “likely to concentrate on allegations of retaliation against whistleblowers, plummeting morale, staff attrition, hiring decisions and a declining number of investigations into fraud in the massive disability benefits program,” writes the Washington Post’s Lisa Rein. Social Security Disability Insurance has long been plagued by inconsistencies in administration, fraud, and abuse. Congress should consider structural reforms in addition to engaging in more oversight.

• Committee for a Responsible Federal Budget released its top fiscal charts of 2022. Highlights include alternative national debt projections, Biden’s impact on the deficit, Social Security insolvency, the cost of student debt cancellation, and more.