Should the US scrap the debt ceiling?

Australia just did, and it's doing fine. Mature countries know when to walk away from a fight.

By The Week Dec 5, 2013 2:24PM
Image: Dollar bills floating over U.S. Capitol © CorbisBy John Aziz, The Week

Debt ceiling fights, it seems, have become a permanent fixture in American politics.

Twice in the last couple of years, the United States has been days away from potentially irrevocable economic damage because Congress refused to raise the ceiling and let the Treasury issue more debt. The next fight is slated for March 2014.

But isn't there a better way to increase a borrowing limit -- and one that doesn't freak out markets, investors, and, well, just about everyone every few months?

The federal government will be able to borrow as much money as it wants after Federal Treasurer Joe Hockey cut a deal with the Greens to dispense with the debt ceiling completely. . .
It means the government will not have to ask the Parliament for permission whenever it wants to borrow money above a certain limit. [Sydney Morning Herald]
Some may be extremely concerned by this possibility. If the government can borrow all the money it wants, then won't that lead to the government making extremely irresponsible decisions, such as spending huge amounts of money it doesn't have building bridges to nowhere?

But it's actually a brilliant idea -- and one that America and the rest of the world would do well to implement as soon as possible -- because it would eliminate the uncertainty and confusion of debt ceiling fights. And there is no reason -- absolutely no reason -- to believe that it will lead to excessive government spending. Why? Because there already exists a natural debt ceiling called interest rates -- the cost at which investors in the market will lend the government money.

The U.S. government is legally bound to pay its debts, and as the issuer of currency it has the means to do so. This means that U.S. government debt is considered by the market to be a very safe asset. And, as Frances Coppola argues, that means that it is a critically important part of the global financial system, because it is used around the world as collateral for lending and as a store of purchasing power.

Right now interest rates are very low by historical standards, even after adjusting for inflation. This means that the government is not producing sufficient debt to satisfy the market demand. The main reason for that is the debt ceiling.

If the Treasury became extremely profligate and started borrowing much, much more -- say, increasing borrowing from just over half a trillion dollars a year to ten trillion dollars a year -- interest rates would rise significantly, making it unaffordable for the government to do so. That is the only debt ceiling we need.

The debt ceiling today is particularly badly designed. Why? Because it's denominated in an arbitrary number of dollars. Let's say you are a government with $1,000 of debt. Can you repay it? It depends what your tax base is. If the whole economy is generating $10 of activity per year, you have no chance. At a 30 percent tax rate, that would yield just $3 per year in tax. But let's say you have a $10,000 economy. Then, a 30 percent tax rate yields $3,000, meaning that $1,000 of debt would be easy to repay.

So the sustainability of your debt is dependent on the size of the economy, and the size of your debt is much more meaningful if it is expressed in terms of the amount of activity taking place in the economy (GDP).

So should the current debt ceiling be replaced by a ceiling expressed as a percentage of GDP? While that is slightly less stupid than the current system, it is still not the best idea because it would be very hard to agree on what constitutes a sustainable level of debt. For example, Harvard economists Ken Rogoff and Carmen Reinhart published a well-received paper suggesting that 90 percent of GDP was the level at which government debt becomes damaging to economic growth. But their 90 percent limit has been completely debunked since. Great Britain, for example, had a debt over 250 percent of GDP in the 19th century, and successfully paid it down without defaulting.

Essentially, then, the only sensible way to determine how much the government can borrow is whether or not people are willing to lend the government more money. Australia has made a very smart move, and the U.S. should follow suit as soon as possible.

More from The Week
Dec 5, 2013 3:18PM

“The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. government can’t pay its own bills. ... I therefore intend to oppose the effort to increase America’s debt limit.”

— Sen. Barack Obama, March 16, 2006

Did that change AFTER '57 States' raised the debt 7 trillion more?  We should just BAN deficit spending.

Dec 5, 2013 3:31PM

How do these idiots get their jobs writing these stupid articles?


"So should the current debt ceiling be replaced by a ceiling expressed as a percentage of GDP?"


Why can't we stop spending more than we bring in? What would you do if your kids keep buying new skiis and new iphones with your credit card? Do you keep raising the credit limit or do you tell your kids to cut back?

Dec 5, 2013 3:50PM
the title should read "Should the US scrap responsibility?"
Dec 5, 2013 2:57PM
They have already been irresponsible buy not paying down the debt. We HAVE a history to base it on. Why not just give the fox the key to the hen house or give the banking industry a blank check...... we already did that its called the Federal Reserve
Dec 5, 2013 3:22PM
Whoever wrote this article is an idiot who obviously doesn't understand modern economics, and also apparently doesn't bother to do any research.  Not to mention the fact that they apparently don't have any concern over government debt, spending...or the simple fact that the debt a government creates is always paid for by its people at the end of the day.

Nice attempt at using the UK.  Too bad it's an example from the 19th century, when economics was much simpler.  By the way, the UK's national debt is rising and has been for years.  Oh, it is also expected to reach 99% of their GDP by next year.  But hey, it's only money right?

I would much rather have the uncertainty of a "debt ceiling", which at least puts SOME control over careless spending by government, rather than no debt ceiling and no control.  Trying to claim that interest rates control government spending is asinine at best.

Especially when that government doesn't give a beggar's damn how much of OUR money it wastes.
Dec 5, 2013 3:34PM
Yes we not only should have a debt ceiling but a balanced budget ammendment that only could be over riden by a 2/3 vote in the house and senate once certified as a time of national crises by the President of US, who could not run for office again after doing so.
Dec 5, 2013 3:56PM
Im sure the democrats would love it. Not so good for the taxpayers though.
Dec 5, 2013 4:16PM
Hell NO! It's the last little thing we have to keep the government slightly in check. What we need are representatives with enough balls to say NO MORE!!!!!!!!
Dec 5, 2013 3:59PM

Aziz....  clearly you were not thinking when you wrote this.  One can only shake their head at the lunacy of letting Washington spend all they want.  So as all the news reports say that the influence and power of America is falling world wide because of crushing entitlement costs and failure to provide a long term budget, you think the idea brilliant.  Amazing.

Dec 5, 2013 4:18PM
How can anyone ever justify a blank check?  We must rein in our debt and begin to lower the debt ceiling.  No business or family can borrow indiscriminately without going bankrupt.  The government must set an example and practice fiscal prudence starting now.
Dec 5, 2013 4:22PM
Wow, that makes sense, get rid of the debt limit. Then we can spend until we are all wealthy. I would feel bad for the young because they are the ones that are going to be stuck with this bill, BUT for the most part, they voted for this.

I guess the really young, those under 18 didn't ask to birthed by the worst generations. They are the ones that are really getting hosed and don't deserve parents, grandparents or a government so sorry.

Now as for the Canada comment, what the stupid MSN article fails to mention is they balance their budgets, deport instantly ALL illegals (most to Papua New Guinea) and the entire Ausie culture despises "the dole" and those that spend their lives on it. And finally, they have exploited their energy reserves for their benefit being the biggest exporter of coal to China, unlike our retarded government.

Yeah, you can get rid of a debt limit when you don't have one. Stupid article, but at least consistent in that it panders to what those with their hands held out want to hear. Gimme my Bama dollars! Right?

Dec 5, 2013 5:10PM
John Aziz, congratulations, you have just written what is by far the most stupid article I have ever read on ANY subject in my life.  The insanity of your proposal is absolutely mind-numbing.
Dec 5, 2013 4:43PM
I've got a better idea: Just pass a Balanced Budget Amendment that only allows deficit spending with a 2/3 majority vote in both houses, not otherwise. And those bonds have to be paid when due and not rolled over with more debt without another 2/3 majority vote. Then we'd seldom need to raise the debt ceiling again. Then the craven legislators (theme song "I'm just a girl who can't say NO!") would have backup to vote to cut spending, even over the media "yelling" by all the special interests.
Dec 5, 2013 4:51PM
Dec 5, 2013 4:28PM
With all the thumbs down here, I have yet to see one of them post
Dec 5, 2013 4:37PM
Article I - The Legislative Branch
Section 7

Clause 1:

All Bills for raising Revenue shall originate in the ; but the  may propose or concur with Amendments as on other Bills.

Clause 2:

Every Bill which shall have passed the House of Representatives and the Senate, shall, before it become a Law, be presented to the President of the United States; If he approve he shall sign it, but if not , with his Objections to that House in which it shall have originated, who shall enter the Objections at large on their Journal, and proceed to reconsider it. If after such Reconsideration two thirds of that House shall agree to pass the Bill, it shall be sent, together with the Objections, to the other House, by which it shall likewise be reconsidered, and if approved by two thirds of that House, it shall become a Law. But in all such Cases the Votes of both Houses shall be determined by yeas and Nays, and the Names of the Persons voting for and against the Bill shall be entered on the Journal of each House respectively. If any Bill shall not be returned by the President within ten Days (Sundays excepted) after it shall have been presented to him, the Same shall be a Law, in like Manner as if he had signed it, unless the Congress by their Adjournment prevent its Return, in which Case it shall not be a Law.

Clause 3:

Every Order, Resolution, or Vote to which the Concurrence of the Senate and House of Representatives may be necessary (except on a question of Adjournment) shall be presented to the President of the United States; and before the Same shall take Effect, shall be approved by him, or, shall be repassed by two thirds of the Senate and House of Representatives, according to the Rules and Limitations prescribed in the Case of a Bill.
Dec 5, 2013 6:37PM

Yea, this article is ridiculous and it’s unfortunate so many people think this way!  The idea that you can continue on with our failing fiscal policy without change until it completely falls apart.  How can we even elect these “so called” leaders when they have a complete lack of foresight!


The current system does not work, and stopped working decades ago.  It’s past time, the amount of money the US spends is taken out of the hands of Congress, the Senate and president.  Completely taken out of their hands!  This function truly belongs in the hands of a few elected economist and accountants; one term so there is no playing for votes.  Once the amount is set, our elected officials can plan out how it will be spent.  So they are working on a budget based on percentages well before they are shown the amount.


You take the credit card out of their hands because they are incompetent with money, just like a little kid.   You don’t give someone a credit card when they repeatedly prove they lack the financial skills.

MSN money should be embarrassed to post articles like this... no common sense!

Dec 5, 2013 4:54PM
Wow, time to stock up on bitcoins, silver and platinum, batteries, food, water. screw this government and all the other ones. 
Dec 5, 2013 4:50PM
Might as well officially do away with the "debt ceiling" since it's been no such thing anyway.  It has been raised nine time since Obama took office, and 63 times in the last 50 years.  It has even been temporarily suspended TWICE under Obama!  So you see, the average has been to raise the so-called Federal spending "limit" more frequently than once per year.

On the other hand, it has been a nice advertising gimmick for the Administration and Congress to sell the populace that they are REALLY, REALLY serious about controlling Federal spending.

Dec 5, 2013 4:12PM
As Bad as the National Debt issues are, they are child's play compared to issues of $500-700Trillion in Scam Banking Derivatives spread across the globe. Derivatives are what froze up the monetary system, not the National Debt.

We will never BAN deficit Spending. Proof, Reagan Triple the Debt, Bush Doubled the Debt, and Obama is on Pace to do the same as Bush. This is all leading to one World Currency and One World Government.

Apparently MG stills thinks there are 57 States. While MG is BS about something that won't change until after the Epic Global Collapse, China is using those same phoney Fiat Dollars to become the next Superpower. The Gig is up, now it's about who's smart enough to take advantage before the Real Downfall begins. So far, that has been China while we can't get out of our own way.

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