Warren, Trump, and the Debt Limit
In a rare twist, Elizabeth Warren and Donald Trump agree on one thing: that the United States should repeal the federal debt limit. They have a good point; the debt limit is an ineffective “solution” to a real but oft-mischaracterized problem.
That problem is not the debt per se. Any economic entity—whether a consumer, business, or government—can sensibly take on debt to finance expenditure, assuming the entity has reasonable prospects of re-paying the debt. This might occur if the borrowing finances the purchase of a durable asset such as a house; or finances investment in new plant and equipment that pays a future return; or pays for a war that is vital to a country’s survival.
The problem for the United States is that, under current policies, the federal government cannot plausibly pay for the projected path of future expenditure. Current estimates suggest that entitlement spending—on Social Security, Medicare, Medicaid, and Obamacare—will grow significantly faster than the economy on average, implying the U.S. will eventually spend all or more of its GDP on these programs. That cannot actually occur; before that point, the country will experience a fiscal meltdown. Tax increases can postpone this reckoning for only a limited period, since higher and higher tax rates will slow economic growth.
A debt limit makes sense, therefore, only if it slows the path of federal expenditure.
But that effect of a debt limit is unlikely. Faced with a binding constraint, Congress can increase the official limit, as it has done 78 times since 1960.
Politicians play this game because having an official limit appears to promote fiscal responsibility without the pain of limiting expenditure. The same applies for balanced budget amendments and spending caps; these also pretend that rules can promote fiscal balance, while avoiding explicit discussion of expenditure. These approaches plausibly harm fiscal balance by providing a false sense of security.
Thus, Trump and Warren have it right: repeal the debt limit and focus policy debates where they belong, on excessive expenditure.
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Nice analysis. I am in agreement on excessive spending, but I’m not sure why we’d raise the debt limit as a solution.
I think it would be better to limit spending and/or produce additional streams of revenue for the government other than direct taxes (except maybe estate tax). For instance, the government is still owed compensation for its support of Ukraine and helping to bring Iranian nuclear enrichment facilities and funding of terrorism into compliance with international law. If the peace negotiations were to include US ownership of Zaporizhzhia Nuclear Power Plant or the Straight of Hormuz, for instance, then the programs could be funded by international deal making rather than debt or taxes.
"these also pretend that rules can promote fiscal balance, while avoiding explicit discussion of expenditure"
And revenue. :)