The Debt Limit

As a student of Modern Monetary Theory and a person with actuarial training in financial mathematics I find this debt limit rule to be unnecessarily risky. There is no gain with having it as they just extend it every time. The dangers of default however are fairly high.

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I wish they had learned from the last shutdown, and pre-authorized making interest payments to avoid outright default, and pay for those employees that will be obliged to work without pay.

I’m not a fan of the political games that emerge when the debt ceiling comes into play, but I also think it’s not entirely wise for the government to give itself a blank check.

I wish Congress could both be fiscally responsible and not play hardcore political games.

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The government has a blank check. There is no constitutional limit on how much the government spends.

The debt limit has proved useless in controlling borrowing. It sets up a bunch of political posturing, risking very serious economic losses, with no significant spending cuts or tax increases.

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I agree. Since federal spending (and taxing) does not seem to have a sensible measure of justification for spending, tracking of application, and analysis of its effect I see no reason to have an arbitrary limit on spending (or taxing).

However, there is a Constitutional requirement that the government spend no money without Congressional authorization. The government can always issue itself more checks, but there is almost always a notional constraint.

I agree with the notion that the debt ceiling has become nothing more than a political baseball bat that congresspeople use to beat each other with despite the risks to the country, but I think not having to occasionally face just how much debt the government in might actually be slightly worse.

Have the Democrats played games with the debt limit? I guess “not making it 500 trillion when they had a chance” might loosely qualify, but this seems like it is a game that Republicans play to score points on things their base does not really understand.

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Seems like that happens when they pass the bills with the spending in them. This is making the authorize it twice.

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lol burgers

I perceive (perhaps uncharitably) the following difference between the two major parties:

Dems will happily spend money, but they at least occasionally try to find some revenue to support that additional spending (usually from sources more likely to support the GOP).

The GOP will happily cut spending if the spending cuts don’t affect their pet projects, or those of their supporters. Some of them are willing to use such cuts to fund their pet projects. They also like tax cuts. They aren’t opposed to raising revenue through other means (usually through means more likely to impact Dems and their supporters).

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I disagree.

There’s a difference between saying “let’s spend a billion dollars” and “let’s increase our credit limit by a billion dollars”.

They could combine the two…but if they do, a majority of them won’t think about the debt piece.

Not if they spend the billion dollars anyway before formally raising the credit limit.

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I see the spending choices by the two parties as following their different ideologies. Democrats want the government to take care of the lessers so the betters can get on with business and if the betters have to give a little that’s ok, like a tithe at church. Republicans thinks government needs to assist the betters so they can take care of the lessers, no tithe, just pass the plate. Note both the R’s and the D’s work under and support the ideology of American capitalistic corporatocracy (power and wealth resides with the betters) with their primary agenda serving their corporate donors.

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There isn’t necessarily a difference in practice, but having a debt limit at least forces Congress to periodically acknowledge the magnitude of the debt.

(Of course, if they’d quit running deficits, the debt limit would cease to be an issue, despite the size of debt.)

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Sometimes I see things that seem to conflate “cutting spending because we hit the debt limit” with “defaulting on the debt”.

Most recent CBO 2023 estimates have the federal government funding about 75% of its spending through taxes. “Spending” includes interest on the debt, and that interest is maybe 25% of tax revenue.

If the Treasury “simply” prioritizes debt payments, it has no need to default on borrowing. Yes, that may mean not paying bills submitted by Medicare providers or cutting SS checks, I haven’t looked at how much they save by cutting “non-essential” workers.

In theory, it serves as a check because some appropriation bills don’t have dollar limits. But the political gamesmanship around it seems to be causing more harm than the good the limit might have.

I think one of the biggest sources of this particular problem is the idea of credit spending: spend the money now with the intent of paying it from (future) revenues . . . so things look “balanced” up front, but one side of this fiscal scale (if not both) goes off.

And there’s no real “repercussions” when this happens and the politicians don’t “wait” until that deficit is cleared.

Before we get all excited about reducing the debt, let’s think about that for a bit.

If we run a surplus, there are a couple of risks. I remember the last surplus under Clinton. There was some consternation about what to do if the 30 year bond disappeared. That is a big benchmark in the bond world.

But even more concerning is the effect on the money supply. If the population growth is greater than the growth in money supply, then there are fewer transactions (measured in $s) per person. A contraction. Now if that leads to general deflation then we have a problem. Deflation is more dangerous than inflation. In deflation, the winners/losers flips. In deflation you do not want to be paying off debts with money that’s worth more tomorrow than today. Bankruptcies will increase. Businesses contract and new job creation falls, since who wants to take on debt? Asset prices fall. Savings in pensions and IRAs drop. All in all, pretty brutal.

Got to be super careful when you approach potential deflation zones.

I remember that, too. And, Bush immediately pushed for tax cuts. Presto, surplus goes away.

Getting rid of surpluses is politically popular. I’m not worried on that side. Getting rid of deficits on the other hand …

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Between the structural nature of the surplus, tax cuts, and the response to 9/11, the 00’s were a big reversal.

We’re a long way from needing to worry about the financial consequences of retiring bonds.

Refusing to raise the debt limit is akin to not paying your credit card minimum payment. Your credit limit immediately takes a massive hit and some lenders might not lend to you anymore.

Now that’s not to say that everything is fine and we should just keep doing what we’re doing. We need a rational budget process that works at keeping the deficit down if not necessarily a balanced budget, We do need to get away from blank check budgeting.