Democrats Should Heed Mitch McConnell’s Advice
(Bloomberg Opinion) -- If Democrats want to be known as the party of fiscal responsibility — and that seems to be their aspiration, even if the reality doesn’t always match up — then they should take the advice of one of their oldest and most powerful antagonists: Senate Majority Leader Mitch McConnell.
In fact, they should go beyond his advice, which is to raise the debt limit as part of the budget reconciliation bill they are currently negotiating among themselves. They should set the limit so high that they’ll almost certainly never have to vote on it again.
Yes, doing so will come at a political cost. But in the long term, it will burnish their image as careful stewards of the public purse — and allow the government more flexibility, which is something Democrats should favor.
To be clear, taking McConnell’s advice would increase the risk that vulnerable purple-state Democrats, who are fighting to reduce the cost of President Joe Biden’s economic package, could be unfairly cast as supporters of debt and deficits. All the same, Democrats should focus on the long game.
Republican grandstanders such as Senator Ted Cruz will make hay over a debt-ceiling standoff no matter what. But that’s mostly for reasons having to do with the internal politics of the Republican Party; the goal is not only to attack Democrats as supporters of out-of-control big government, but also to criticize Republican leaders as spineless. Among many disaffected Republican voters, McConnell is almost as unpopular as House Speaker Nancy Pelosi.
The best response is for Democrats to remove the debt ceiling as a political issue. And the most straightforward way to do that is to set a permanent debt limit of three times U.S. GDP, which stands at almost $23 trillion. (The current national debt is about $27 trillion.)
Such a move is not only tactically advantageous, it’s the most fiscally sound approach to managing the national debt.
There are basically two arguments against getting rid of the debt limit and allowing deficit spending to continue unchecked.
The first is that it would lead to an ever-increasing portion of the federal budget being devoted to interest payments. Over time, according to this argument, spending levels on government programs could be maintained only with ever-higher taxes, slowing economic growth and crowding out productive investments.
Research, however, shows that this problem is actually about the yearly deficit, not the overall debt. Stabilizing the deficit at about 2.75% of GDP would allow the U.S. economy to carry any size debt. Moreover, interest rates are currently so low that the cost of financing the debt has actually fallen in recent years, despite increases in borrowing.
The second objection is more speculative and goes something like this: Yes, interest rates are low now — but they could rise suddenly, thrusting the country into a crisis.
That kind of run-up, however, is likely only if creditors think the U.S. will default on its obligations. And ironically, the only time that fear arises is when there are showdowns over the debt ceiling. In uncertain times — during the pandemic, the Great Recession, after 9/11 — interest rates actually fell as creditors assumed the U.S. government was a relatively safe borrower. In contrast, the 10-year U.S. Treasury rate rose through the first half of 2011, when Congress was engaged in a protracted showdown over the debt ceiling — and fell precipitously in August when a final agreement was reached.
In fact, the better question is not whether setting the debt limit to 300% of GDP is a good idea — it’s whether it’s a better idea than simply abolishing it altogether. The answer is yes, because of politics. The debt limit cannot be eliminated through a budget reconciliation bill, and so would require the support of the very senators who stand most to gain from keeping debt-ceiling theatrics alive.
Setting it equal to 300% of U.S. GDP would give the government the flexibility it needs in times of crisis, yet it is not so absurdly high that it would fuel a backlash movement to reduce it. Yes, it would probably produce some temporary blowback. Over the longer term, however, it would remove a persistent threat — politically, for Democrats, and economically, for the nation. In short, it’s the fiscally responsible thing to do.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Karl W. Smith is a Bloomberg Opinion columnist. He was formerly vice president for federal policy at the Tax Foundation and assistant professor of economics at the University of North Carolina. He is also co-founder of the economics blog Modeled Behavior.
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