Charles Lane argues that the nation needs a new debt limit law to reduce the likelihood of brinkmanship.
while GOP factionalism and extremism caused the present predicament, they are also symptoms of a wider breakdown in national consensus that must be addressed if we are to reassure the global economy about long-term U.S. creditworthiness.
Reforming the debt-limit law is one place to start. It has its virtues, chief among them the power to periodically focus the nation’s attention on its accumulated debt burden, which, though related, is a separate issue from the annual level of spending, taxes and borrowing.
Alas, the law was crafted in a different era, before U.S. debts were so large, and our ability to service them so crucial to the world’s well-being. Our politicians were not so easily frightened into voting against a debt increase — or so easily tempted to partisan blackmail.
We need a new debt-limit law for a new era of permanent debt and permanent partisan conflict. Ideally, a reformed procedure would preserve the law’s power to focus Congress on accumulated debt while removing, or minimizing, incentives to delay passage, and thus usurp presidential power.
There should still be votes, but less frequently and with as little as possible at stake each time. One way to achieve this would be to exclude from the debt limit Treasury debt held by the Federal Reserve or trust funds such as Social Security and Medicare, as [Anita] Krishnakumar has suggested. What’s really relevant to the government’s credit is not how much it owes itself but how much it owes foreign governments, banks, pension funds and others — about $10 trillion of the current $16.7 trillion debt.
The idea of excluding certain obligations seems similar to prioritization of payments, which some argue the Constitution compels once the debt limit is reached, and which the House-passed Full Faith and Credit Act would require. (For more on the FFCA, see here.) Lane’s idea would seem to lessen the stakes of debt-limit stand-offs, but I am not sure it would make them less likely. After all, if the risks of reaching the debt limit are reduced, why wouldn’t more be willing to risk it? Further, some prominent bankers believe payment prioritization would still unsettle financial experts.
UPDATE: Bruce Bartlett makes the case that hitting the debt limit is a big deal even if prioritization is possible. While I disagree with his legal analysis, he identifies some practical issues with trying to prioritize payments in the event the debt limit is reached.