October 1, 1995
"The Sky Won't Fall if Debt Ceiling is Abolished"
San Jose Mercury News
By Timothy Taylor
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SOMETIME IN November, the federal government will run into its debt ceiling of $4.9 trillion. Instead of raising the debt ceiling, it's time for a more radical step - abolish the ceiling altogether.

The debt ceiling is a historical accident dating back to World War I. Until 1917, Congress had to vote its approval each individual time the government wanted to borrow money. But with the passage of the Second Liberty Bond Act, Congress instead set an overall limit for debt.

It made sense at the time, since the federal government needed more flexible borrowing authority during World War I. Federal spending increased by a factor of 25 from 1916 to 1919, from $712 million to $18.5 billion. About 70 percent of the World War I spending was borrowed money. For comparison, the entire U.S. economy in 1919 measured just $84 billion.

After World War I, the debt ceiling lapsed into decades of unimportance. In the early 1920s, the annual federal budget had dropped back to less than $3 billion. Moreover, the 1920s were a decade of budget surpluses.

Federal borrowing increased during the Great Depression of the 1930s and even more during World War II, but in both situations, most people had more important things to worry about than how much money the government was borrowing.

The deficits have kept coming - since 1931, the federal government has run a surplus during only eight fiscal years - but they remained relatively small. The debt ceiling was $300 billion in 1945, and after a lot of tinkering in the intervening years, it was again $300 billion in 1962.

The U.S. government has run a deficit every year since then, except for 1969. But through the 1970s, the deficits were small enough that the overall ratio of federal debt declined steadily; for example, gross federal debt was 58 percent of GDP in 1960, but only 34 percent by 1980.

But then the came the outside deficits of the 1980s, which have carried on into the 1990s. In 1995, gross federal debt has climbed to 70 percent of gross domestic product.

This year's federal budget reports 29 increases in the debt ceiling since 1981 - roughly one increase every six months. At this pace, the debt ceiling has become little more than a ritual opportunity for political grandstanding.

In the early 1980s, for example, congressional Democrats regularly used to threaten President Reagan that they wouldn't raise the debt ceiling unless he agreed to higher taxes or lower defense spending. Now, the Republican Congress will probably threaten not to raise the debt ceiling unless President Clinton surrenders on other elements of their agenda.

Such threats are Unabomber logic: Unless you give in to my political demands, I'll be forced to do something really destructive. If the debt ceiling is not raised in time for the federal government to pay its bills, there would be considerable disruption to the elderly, sick and poor people who are depending on the arrival of some federal support.

In addition, financial markets would exact a penalty if interest payments on past federal debt were delayed for even a few days. Such delays mean that loaning to the federal government is riskier, and the government would have to pay higher interest rates for years.

The non-partisan Congressional Budget Office now calls the debt ceiling "an anachronism." CBO points out that the idea of a debt ceiling only makes sense if most spending is determined in the annual budget process. This was largely true back in 1916, but it's no longer accurate.

Two-thirds of all federal spending is now classified as ''mandatory'' in the budget, which means that previous acts of Congress have already promised people that they will be entitled to money through such programs as Social Security, Medicare, Medicaid, other entitlement programs, and interest payments on past debt.

Moreover, the $4.9 trillion debt ceiling includes both $3.6 trillion which is held by private investors and $1.3 trillion that is held in trust funds, like the fund for Social Security. So the debt ceiling not only limits borrowing that drains funds from the private economy, it also limits building up the Social Security trust fund.

As the CBO concluded in a recent report: "By the time the debt ceiling comes up for a vote, it is too late to balk at paying the government's bills without incurring drastic consequences."

A debt ceiling is an open invitation to play out a farce of pompous speeches and insincere threats, before voting for the increase that everyone knows must happen. It's a sideshow, a distraction from the trench warfare of deficit reduction.

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