The $2.4 trillion debt-limit raise

By Felix Salmon
June 7, 2011
a pretty concrete figure: $2.4 trillion.

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Amid all the fuss over the debt-limit negotiations, I haven’t seen much emphasis on how much the debt limit is going to be raised. But here’s a pretty concrete figure: $2.4 trillion. It’s the number being “eyed” and “mulled” by Congress, which translated out of Reutersese means that the best-case scenario here is that there’s going to be another knock-down debt-limit fight in the immediate aftermath of the November 2012 election.

Now a $2.4 trillion debt-limit hike is obviously a much better outcome than the $290 billion increase that Congress passed at the end of 2009. And by historical standards it’s large. But as these discussions become increasingly fractious and political, they must also become increasingly infrequent, for fear that they’ll simply become budget negotiations by proxy. (Or even something else entirely: while the Republicans are insisting on spending cuts this time around, there’s no telling what the quid pro quo might be next time.)

It’s too much to hope that the debt limit will be abolished entirely, despite it doing no good and lots of harm. But can’t Congress make it dynamic, at least? Set it at a certain percentage of GDP, something like that? If they wanted, they could even make that percentage decline over time. Anything would be better than the system we’ve got right now.


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>>Anything would be better than the system we’ve got right now.>>

It would be better if you wanted a functioning government. At least one party is very much against that idea.

Posted by 3oosion | Report as abusive

The problem with including GDP in a statutory limit of this sort is that it’s somewhat imprecise; the fix would no doubt be the an estimate from the executive branch, which, even if we don’t expect to slouch toward Argentine levels of chicanery in the economic numbers too terribly quickly, at least formally weakens the check that the legislative branch has here on the executive branch. Besides, it’s not as though the problem right now is because GDP has grown so quickly that, even though we’re reducing debt/GDP, the numerator is growing in absolute terms; if that were the issue, I expect this would be a lot less contentious.

Posted by dWj | Report as abusive

Insisting that there be a debt limit at all is the act of a person who does not have faith in the market’s abilities to price debt.

Is anyone honestly surprised that the entire Republican Party doesn’t trust the market?

Posted by klhoughton | Report as abusive

It’s not the debt, nor the budget that’s at stake. When AG says we’re betting the ranch and Bernanke talks beyond bank policy they mean Medicare. Pass the Ryan plan. Send telegrams. Yell at your Congressman or Congresswoman. Get it done now.

Posted by threeRivers | Report as abusive

You’re absolutely right, Felix. There’s absolutely no need whatsoever to raise the debt limit, it’s already too high. Let’s see some spending cuts, God knows there’s plenty of ripe targets.

Posted by ParContre | Report as abusive

Ripe targets?

* Social Security
* Medicare, Medicaid
* Defense
* Interest on the debt

That’s 67% of the 2010 spending right there, and (I think?) more than 100% of tax revenues. You could eliminate every other government function and we would STILL need to raise the debt limit. Unless you are ready to raise taxes.

Posted by TFF | Report as abusive

Defense is the big one. For example, the US has 11 carrier groups active, the next closest country has 2. Each carrier group costs $20 billion to purchase (not including aircraft), and has an annual running cost of $1 billion/year (as of 2000, probably more now).

With new ballistic anti-carrier missiles and unmanned drones, one wonders if developing new platforms (the Ford-class) for launching manned planes off a ship is actually value for money…

Carrier cost (2000) PDF:
Acquisition cost:
Anti-ship ballistic missiles:

Posted by ChrisMaresca | Report as abusive

To all the deficit hawks out there – I used to be one of you. Then I stumbled on the realization that our bond market doesn’t fund anything in the post-gold-standard age. We don’t need to borrow money from China or anyone else in order to spend. When the federal government spends money it just comes into existence. When we tax citizens or sell a bond, the proceeds simply cease to exist. When we pay interest, that money doesn’t come from some account where we’ve “saved” it up – it is created by the act of being spent.

The commenter who said there is no reason for the government to borrow is correct, although not for the reasons I suspect he meant. Our monetary system could function perfectly well without the treasury bond market – it’s a hold over from the gold standard. You can think of treasuries as a proxy for dollars – they are fungible. Just pretend that all those treasuries our there are actually dollars, if China wanted to spend dollars on something they could exchange their treasuries at any moment.

The fact that our debt ceiling continues to rise is more a function of the fact that we continue to purchase more foreign goods than foreigners purchase of ours. As we net send dollars overseas there are fewer dollars in circulation at home. Government spending replenishes the supply so to speak.

Posted by Linc01 | Report as abusive

That’s an interesting point, Linc01.

The distinction between bonds and dollars, though, is that the bonds carry a coupon. Might be more attractive to foreigners holding them long-term?

Not sure that a rapid increase in money supply (whether borrowing or otherwise) is a cure-all solution, though. At some point people lose faith in the currency. Then what?

Posted by TFF | Report as abusive