The Wisdom of the Debt Ceiling
Even though I often disagree with his conclusions, I’ve long been a fan of New Yorker correspondent James Surowiecki. In his articles and his book, The Wisdom of Crowds, Surowiecki has come up with some off-beat arguments that challenge conventional wisdom, such as his recent piece on why the earthquake in Japan may not prove as economically devastating as feared. And he usually marshals an impressive array of facts to back up his assertions.
This is why I find his article in this week’s New Yorker, “Smash the Ceiling,” so extremely disappointing. It does little more than parrot, albeit with the writer’s usual elegant prose, the conventional wisdom that the debt ceiling is a disruptive relic that takes the focus from what should be more important priorities. “The debt ceiling is an anachronism,” Surowiecki writes, in phrasing that echoes the most pedestrian liberal editorials. “Instead of figuring out ways to raise the debt ceiling, we should simply go ahead and abolish it.”
Surowiecki, more than most, usually recognizes that authors’ opinions don’t entitle them to their own facts. So it is especially disturbing to see him mangle basic facts about the debt ceiling’s history without citing a single source.
According to Surowiecki, “the debt ceiling, which was adopted in 1917 . . . was a way for Congress to keep the President accountable.” This is the opposite of the truth: The debt ceiling was not a new constraint on anyone’s ability to borrow, and there was no need to “keep the President accountable” regarding debt, because the Constitution does not give the president the power to borrow money in the first place.
As I have written previously on NRO, “what is now called the ‘debt ceiling’ or ‘debt limit’ was actually created as an expansion of the Treasury Department’s ability to borrow, rather than a constraint on it.” According to a 2008 Congressional Research Service report that Surowiecki apparently did not consult, before World War I, Congress “authorized specific loans” and “allowed the Treasury to issue specific types of debt instruments” rather than giving a blanket authority to borrow up to a certain amount. For instance, Congress approved specific borrowing to finance construction of the Panama Canal in the 20th century’s first decade.
With the Second Liberty Bond Act of 1917, as the report describes, “Congress enacted aggregate constraints on certificates of indebtedness and on bonds that allowed the Treasury greater ability to respond to changing conditions and more flexibility in financial management.”
What did not change is the constitutional requirement in Article I, Section 8, that “Congress” — and only Congress — “shall have power to . . . borrow money on the credit of the United States.” As Michael McConnell, a respected former federal-appeals-court judge, Supreme Court litigator, and director of the Stanford Constitutional Law Center, puts it: “The ‘debt ceiling’ is simply the limit Congress has imposed on how much money the country may borrow. The executive branch cannot constitutionally borrow a dime in excess of this amount.”
Unlike Surowiecki, McConnell documents the relevant constitutional history. “Legislative control over incurring new debt is a fundamental aspect of separation of powers, going back to Parliament’s curtailment of the royal prerogative of borrowing in the wake of the Glorious Revolution of 1688,” he writes.
Surowiecki again proves to be a font of conventional wisdom when he writes that “a failure to raise the debt ceiling . . . would almost certainly throw the economy back into recession.” He and others overlook the fact that when the U.S. was in breach of the debt ceiling for more than four months in the mid-1990s, what followed were some of the nation’s greatest years for economic growth. The debt-ceiling breach was certainly not responsible for this growth, but it shows that a breach of the debt ceiling need not spell economic doom, particularly if the showdown ends in a package that boosts growth or makes long-term fiscal fixes.
Surowiecki would be wise to reread his own words from The Wisdom of Crowds on how the collective judgment of average citizens often proves more prescient than the prescriptions of the technocratic elite. “Most political decisions are not simply decisions about how to do something,” he wrote. “They are decisions about what to do, decisions that involve values, trade-offs and choices about what kind of society people should live in.”
The debt-ceiling debate has largely been about just that. As financial analyst Christopher Whalen writes in his latest column: “A few days or weeks of pain will raise the political temperature in Washington even further and bring all Americans into the proverbial kitchen for a long overdue family discussion about money. And that is a very good thing.” My colleague Wayne Crews and I have argued that this discussion should also encompass the size of the regulatory state.
The esteemed conservative economist Thomas Sowell recently lamented that the debt ceiling appears to have failed to control spending. But to paraphrase one of Sowell’s heroes, the 19th-century French economist Frédéric Bastiat, we cannot see the spending that is “not seen.” That is, spending would likely have been even higher without this limit in place.
The best argument for having a debt ceiling is one of Surowiecki’s arguments for abolishing it: that no European country, save one, has a debt limit in place. “Every other democratic country, with the exception of Denmark, does fine without one,” Surowiecki proclaims.
“Does fine”? Not having a debt limit has not served Greece particularly well.