For the third time in as many years, Congress and the White House are watching the fuse burn closer to the debt limit. Their current standoff shut down the government. If time runs out as scheduled on October 17, default will set off dire consequences for the economy – spiking rates on treasuries and mortgages, cuts or delays in crucial programs, and turmoil unseen since the financial crisis five years ago.
This debt limit showdown is a miserable debate about an issue that nonetheless could benefit from some discussion. Although we face no impeding debt crisis, the Congressional Budget Office projects that under realistic assumptions, debt will start climbing significantly, and permanently, from the end of this decade into perpetuity.
Republicans and Democrats – and more importantly, the country as a whole – would benefit from a debate over a debt limit that improves our fiscal outlook. But the debt limit we have is a bad statistic (absolute debt figures) paired with an even worse enforcement mechanism (outright default). The right debt limit would establish an accurate fiscal target and credible but not catastrophic penalties for falling short. And an agreement to shift to a better measure could provide a face-saving way for both parties to escape from the current stalemate that is threatening default and shutting down the government.
The Right Ceiling
When the Congressional Budget Office, deficit commissions like Bowles-Simpson and business leaders like Warren Buffett about fiscal sustainability, they refer to debt as a share of the economy or GDP. So do the President’s budget and the House Republican budget.