Blog Name

Raise the Roof: Why the Debt Ceiling Is Hurting America



In what has become a regular spectacle in American political theater, the US Congress last week arrived at yet another 11th-hour compromise to avoid hitting the country's debt ceiling and defaulting on its debts. Yet even as another deal is reached, it's confidence in the country's political system—and ultimately its standing as a global economic leader—that gets compromised.

Washington's debt limit debacle is so regularly-scheduled, in fact, it's worth revisiting last year's research from senior fellows at the Peterson Institute for International Economics on the potential damaging effects of haggling over the statutory borrowing limit.

To be clear, the debt ceiling is not a constraint on the budget itself, merely on the ability to fund it. In other words, politicians are effectively arguing over whether to cover expenses that have already been incurred—and agreed upon—in the federal budget.

"The debt ceiling is silly," says Joseph E. Gagnon. "We need a budget and spending authorizations. After that, the debt is determined by arithmetic. Trying to overrule the laws of arithmetic is pointless. As a backdoor way to undo the agreements on spending, it seems rather destructive and overkill."

Overkill with real economic impact, the PIIE study found. David J. Stockton pointed to estimates from Macroeconomic Advisers that "heightened fiscal policy uncertainty of the past few years" had shaved about one percentage point off inflation-adjusted GDP, the equivalent of $150 billion.

In 2011, the United States actually lost its treasured AAA credit rating from Standard & Poor's, though market reaction to the decision was fairly muted, given such a move was once seen as unthinkable.

A trio of economists has developed an index of policy uncertainty that tries to capture the effects of waning confidence in the budget process, among other factors. It shows a clear spike in the last two months, though not as significant as in prior debt ceiling episodes.

The long-term toll on America's credibility is harder to quantify. As Adam Posen put it: "There is no other known example of a solvent democracy flirting with default through sheer political stubbornness."

The worst part of these "fiscal follies," Posen added, "will be the severely diminished ability of the United States to conclude international economic negotiations." America's high ground of good governance is now long gone.

More From