Ceilings on Government Debt, Taxes, and Government Spending-Becker — The Becker-Posner Blog

Ceilings on Government Debt, Taxes, and Government Spending-Becker - The Becker-Posner Blog

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10/06/2013

Ceilings on Government Debt, Taxes, and Government Spending-Becker

In a little over a week the federal government will reach its debt ceiling of almost $17 trillion unless Congress raises the ceiling. I am 99% confident that the ceiling will be raised in time to avoid a crisis. It is difficult to see any useful purpose served by these ceilings. Indeed, I will show why a focus on debt ceilings may even be harmful.

Federal debt is rising toward the present ceiling because the government has been running a deficit between its spending and tax revenue. The government has run a deficit practically every year for many decades, so that Congress has been forced to raise the ceiling over 90 times during the past 70 years, and 15 times since 1993 alone.

The financial burden of the federal debt depends not only on the size of the debt, but also on the interest paid on the debt. The product of the level of the debt and the interest rate essentially determines the government revenue needed to service the debt. The low interest rates on federal debt (and other debt) during the past decade have made it easier to service even a growing debt. The burden of the debt to the economy also depends on the size of the debt relative to GDP. Federal debt held by the public, including debt held overseas but excluding debt held by other government agencies, is about 70% of American GDP.

This debt ratio grew rapidly during the past five years partly because federal spending increased greatly for most of this period, and also partly because GDP has been growing slowly because of the lingering recession. Still, a 70% debt to GDP ratio is much lower than the ratio in some other developed countries. In Japan, this ratio is over 150%, and the ratio is also higher in some European countries.

Many conservatives have liked having a debt ceiling, even though it has been raised many times, because they believe a ceiling helps limit federal deficits. This is why conservative members of Congress in 2011 were able to abolish the “Gephardt Rule. This rule stipulated that when the House adopted a budget, a separate debt-limit vote was not necessary since the ceiling automatically increased by enough to accommodate the spending implied by the budget. Yet since deficits have been common even before the Gephardt Rule was adopted in 1979, it is not apparent that having a separate vote on the ceiling reduced the size of the deficits.

Ceilings on Government Debt, Taxes, and Government Spending-Becker - The Becker-Posner Blog

Conservatives who have supported a debt ceiling to reduce deficits are really usually mainly concerned about the size of government. However, government size depends not on deficits, but rather fundamentally on the level of government spending. Since deficits can be reduced either by cutting spending or raising taxes, both liberals and conservatives can agree on the value of reducing deficits while strongly disagreeing on how to reduce them.  Liberals want to raise taxes to cut deficits, while conservatives want to limit many kinds of government spending in order to reduce the size of the government.

To the extent that debt ceilings mainly induce tax increases to slow the growth in debt, a focus on debt ceilings and deficits does not help rein in the size of government. Moreover, the substantial growth in federal spending during the past 50 years under both Democratic and Republican control of Congress and the presidency strongly suggests that the many debt ceilings during this period did little to reduce the size of government. The numerous deficits over this period even suggest that the ceiling has accomplished little, if anything, in reducing deficits.

For those worried about the growth of government, there is no substitute for a focus on the scale of government spending. Having debt ceilings may not be completely innocuous because they may detract from that focus.

Posted at 10:16 PM | Permalink

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