Regretting raising the debt-ceiling

By Donald Boudreaux
August 3, 2011

By Donald Boudreaux
The opinions expressed are his own.

Reuters invited leading economists and writers to reply to Larry Summers’ op-ed on his reaction to the debt ceiling deal. We will be publishing the responses here. Below is Donald Boudreaux’s reply. Here are responses from Laura Tyson, James Hamilton, Robert Frank, Russ Roberts, Benn Steil and James Pethokoukis as well.

Larry Summers’ cynicism about the new debt deal is justified. What, indeed, is the baseline from which $1.5 trillion is to be subtracted?

That there’s no clear answer to this question — and that there’s no serious effort to avoid the coming explosion of entitlement spending — drives home the truth that this deal really is nothing more than, as The Economist describes it, “a mishmash of expedient stop gaps and promises.”

My objections to the entire debt-ceiling brouhaha, however, run more deeply than those of Prof. Summers.

Unlike him, I dispute the claim that failure to raise the debt-ceiling would have been a calamity. Sure, failure to raise the debt-ceiling would have prevented Uncle Sam from doling out as much money as he promised to dole out to countless numbers of people counting on moola from Washington. But even without a higher debt ceiling, the government’s cash flow would have been more than adequate to pay all of its genuine creditors in full. No actual default would have been necessary.

What would really have been necessary is more accurately described as belt-tightening.

That each of the many programs that stood to be squeezed has a vocal support group is insufficient reason to avoid squeezing those programs. This fact is no less true for sacred cows such as Social Security, Medicare, and foreign wars than it is for federally subsidized bridges-to-nowhere and other such boondoggles.

Elected officials perpetually and proudly proclaim their willingness to “make tough choices.” Those proclamations are meaningless, however — as has been true from 1917 (the year the first debt-ceiling was adopted) through to this very day — if Uncle Sam can borrow as much money as he wishes without constraint.

If the debt-ceiling were a real constraint, rather than a mere public-relations gimmick, members of Congress and the President would then be truly obliged to make the tough choices that they always claim they make but in fact never make.

I regret the raising of the debt-ceiling because I regret relieving Congress and the President of a serious obligation to actually make tough choices on how they spend what is, let us never forget, other people’s money.

7 comments

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[...] is Reuters Breakingviews columnist James Pethokoukis’ reply. Here is a response from economist Donald Boudreaux as [...]

[...] the responses here. Below is Roberts’ reply. Here is a response from James Pethokoukis and Donald Boudreaux as [...]

[...] be publishing the responses here. Below is Franks’s reply. Here are responses from Russ Roberts, Donald Boudreaux and James Pethokoukis as [...]

This is right on. A rare honest comment and a vewry necessary antidote to all the neo-Keynesean mythology coming from the likes of Paul Krugmann. Thanks Professor Boudreaux.

Posted by tibikem | Report as abusive

That is the sober truth of the matter. We are RELIEVED (can you believe it!) that we have given ourselves permission to spend MORE of what we do not have.

Posted by johnvos | Report as abusive

[...] Regretting raising the debt-ceiling [...]

[...] be publishing the responses here. Below is Tyson’s reply. Here are responses from Russ Roberts, Donald Boudreaux, Robert Frank and James Pethokoukis as [...]

[...] responses here. Below is Hamilton’s reply. Here are responses from Laura Tyson, Russ Roberts, Donald Boudreaux, Robert Frank and James Pethokoukis as [...]

[...] Here are responses from Laura Tyson, James Hamilton, Robert Frank, Russ Roberts, Benn Steil and Donald Boudreaux as [...]

Does the author genuinely believe that the failure to raise the debt limit wouldn’t have resulted in a violation of contractual payment terms to any creditor?

Whatever one may think of Federal spending priorities, the U.S. gov’t could not have lived up to its contractual obligations without an increase in the debt limit.

Granted, the Mercatus Institute is correct that the gov’t has signifcant assets. Could they be sold in time to prevent late payments? Quite doubtful.

Ergo the US credit rating would very likely fall, and that means interest rates would rise in myriad arenas.

No entity – no individual, no business, and no nation – can violate its contractual obligations merely on the grounds that it desires to cut spending, without consequences.

Posted by RMoS | Report as abusive

Having read Larry Summers depressing (to me) account of the debt ceiling decision, I was elated to read Dr. Boudreaux’s opinion, reflecting my own sense of things. No economist, I do own a business and run a household, however, which should qualify me for a reasonable opinion. Indeed, any self-sufficient person qualifies as we all live by the laws of economics or we wouldn’t be self-sufficient. Among these are, spend no more than you make, and cut spending when you make less, otherwise you jeopardize yourself and loved ones. What blindness and fantasy-thinking overcome politicians and their followers is beyond my comprehension. I do believe they know nothing about how wealth is created and the human nature that drives that creation. If they did, they could not possibly hold to their world view.

Posted by kathygornik | Report as abusive

The US Treasury has easily been borrowing, and then spending, money amounting to near 12% of GDP recently. Other sectors of the economy, business household or financial have been cutting back their borrowing out of preference, necessity or inability to find lenders willing to lend to them. That isn’t about to change soon so if the government can’t borrow more then 12% of GDP disappears. This is not belt tightening, it is a depression.

The expansion of credit is an existential necessity for the system to remain intact. Not that the system isn’t dysfunctional, that is another argument. Well we have already put off and end to the breakneck borrowing by the government but if by some odd chance we did then we would go into depression. You can’t cut 12% of total cash flow from the economy and not have a depression

Posted by rapier | Report as abusive

[...] Here’s Boudreaux on holding the line on the debt ceiling (emphasis Matt’s): Unlike him, I dispute the claim that failure to raise the debt-ceiling would have been a calamity. Sure, failure to raise the debt-ceiling would have prevented Uncle Sam from doling out as much money as he promised to dole out to countless numbers of people counting on moola from Washington. But even without a higher debt ceiling, the government’s cash flow would have been more than adequate to pay all of its genuine creditors in full. No actual default would have been necessary. [...]

why am i supposed to take seriously the ramblings of someone who talks about “moola?”

look, the congress already approved the spending and taxing policies in place: that’s the constitutional way.

deciding arbitrarily that some of those approvals should be ignored is the advice of an authoritarian who hates democratic governance, not a useful contribution to debate.

the debt ceiling is an utterly stupid device and should be done away with, not used as a cudgel to bypass constitutional norms.

as to the particular point, the idea that it would be just grand to simply break existing contracts and/or laws: i can’t imagine a less rational contribution.

nor can i imagine what this clown teaches his poor students, other than things they will have to unlearn in the future.

Posted by howard7 | Report as abusive

When one considers how many ways the wealth of the nation is distributed and redistributed, from subsidies to the top, from the top, to the bottom, from the bottom, and very likely sideways, it should be a matter of real confusion and no doubt endless debate, what “other people’s money” really means.

No one really has anything but other people’s money, especially now. The process is supposed to work best when it is a matter of exchange. Somehow the reservoirs must be filled, or the fountains run dry and the gardens and the gardeners die.

Fountains usually pump water. It is not necessary for them to pump blood. I’ve never understood the theology of blood. Do those who believe in it, or seem to, understand it themselves?

Posted by paintcan | Report as abusive

[...] the responses here. Below is Tyson’s reply. Here are responses from Benn Steil, Russ Roberts, Donald Boudreaux, Robert Frank and James Pethokoukis as [...]