Treasury Secretary Jack Lew sent a letter to Congress last week with a stark warning: If you thought that you had until the end of the fall to raise the debt limit, you were wrong.
Little more than six months after the last time Congress raised the federal debt limit – the latest suspension of the limit was set at about $18.15 trillion – the government is once again forced to lift the level permissible for borrowing when it likely hits the debt ceiling in early November.
The Fiscal Times labeled Lew’s latest warning on the debt limit a “bombshell,” but it was in fact consistent with the earlier time frame Lew had warned of previously. In his letter, Lew said as much:
“On July 29, I wrote to inform you that the extraordinary measures we have been employing to preserve borrowing capacity would not be exhausted before late October, and that they likely would last for at least a brief additional period of time. That continues to be our view, based upon our best and most recent information.”
We have a troubling dynamic on the debt limit. In recent years, lawmakers seem to have interpreted Lew’s warnings to mean that the outer limit on the range of dates when the debt limit might be breached is the “true” deadline for action. This is an extraordinarily dangerous assumption.
When tax receipts come in below estimates, as they have this quarter, the earlier date in the range provided by Lew is more likely to be when the limit would be breached. That means that Congress will have to figure out a way to adjust the limit this month, even with the backdrop of the House Republican leadership elections and a nascent revolt among some elements of the Republican conference against the very idea of raising the limit.
Congress actually has no choice but to raise the limit. This is necessary for the government to meet all of its obligations, which are based on spending and tax policies already approved by lawmakers. A federal default on even some of these obligations could have a very negative effect on global financial markets and economic growth.
In 2013, at the brink of an earlier debt limit showdown, the Peterson Foundation projected what could have happened had there been a brief, “technical” default that was easily resolved. The study concluded that even with only a short-term default, the unemployment rate still could have risen as high as 8.5 percent and that 2.5 million jobs could have been lost.
After Congress has dealt with the necessary debt limit increase this month, it should pursue long-term reforms in the debt limit process. The limit should not be tied to an arbitrary amount of money that has little bearing on the actual debt. Instead, it would be better to tie it to a more meaningful benchmark, such as gross domestic product. While several different reform proposals have been advanced, the goal of any ultimate reform should be to end the periodic legislative clashes and brinksmanship over the debt limit and shift the focus to long-range planning.
Contrary to what the name suggests, the debt limit is not – nor has it ever been – an effective way to manage or reduce the nation’s debts. Instead, it has been a venue for dangerous partisan combat that puts short-term political advantage over the creditworthiness of the nation and the stability of the global economy.
With a new leadership team in place, Congress should first raise the debt limit to avoid an immediate crisis and then swiftly move to reform the debt limit process once and for all.