Another Debt-Limit Fight is on the Horizon: Another Chance for the US to Make the Right Decision

In mid-October, Treasury Secretary Lew estimates the United States Federal Government will have reached its’ borrowing limit. He’s asking for Congress to deal with this problem. The President is asking for a single vote to approve the debt limit increase without any strings attached.

In the last five years, I’ve turned around two very different businesses. In both cases, these businesses were losing money and needed to be made profitable. In both cases, I didn’t seek additional borrowing capacity because you can’t borrow your way to prosperity and borrowing only leads to more servitude to the lenders. Yet this is precisely what our government is doing. They are borrowing money at an astounding rate – nearly $85B every month. They have been doing this since Obama introduced his first budget and got it passed on a party-line vote in both houses.

We are poorly stewarding our children and grandchildren’s wealth. We are spending it on ourselves. We want all these services from the government, but we don’t want to pay for them. What we are doing is immoral. The Republicans are right to tie real spending cuts to the raising of the debt limit. The President is wrong to ask for increased debt without any concern about the mounting debt we are amassing. Defunding ObamaCare is not an issue that Republicans should be willing to trade a government shutdown over, but the debt ceiling limit is, IMHO. Debt can literally kill any household, organization, business and even a country. Our debt, it seems to me, represents an increasing national security problem. If we use up all our credit to pay for social programs, we won’t have the ability to borrow during times of war to pay for the spike in spending a war costs. Indeed, we have seen this to be true in the last 10 years as our ability to borrow to finance two wars did not curtail our social spending. At some point, investors will no longer believe the dollar (via Treasury notes) is worth investing in or they will question the government’s ability to pay back its’ debt and curtail their lending. Consider this extended quote from White House Burning (emphasis mine):

“Although the United States survived the War of 1812, the accompanying fiscal crisis proved the importance of government borrowing and of the infrastructure necessary to raise large sums quickly. By the end of the war, the national debt stood at more than $ 120 million, a record in nominal terms but probably only about 15 percent of GDP. But, as Hamilton had realized, some amount of debt could be consistent with both political stability and economic prosperity.

A given debt level is “sustainable” if lenders think that the government will be able to make required principal and interest payments in the future. In this context, it is the scale of the debt relative to the size of the economy that matters, because a larger economy means a bigger tax base from which government revenues can be drawn. If the economy grows faster than the debt increases— because growth is high, interest rates are low, or the budget is in surplus— then lenders will have confidence in the government’s ability to pay and will buy bonds when it needs to borrow. Maintaining that confidence is crucial to preserving the government’s ability to borrow money in a crisis, of which war is the classic example.

Confidence in government debt can also provide economic benefits. Both families and companies want to park their savings in a risk-free, interest-bearing asset, of which government debt— at least that issued by certain countries, such as the United States— is the best example. A liquid market for government bonds can also benefit the financial system by providing a risk-free instrument to use as collateral for financial transactions. The ability to issue debt, however, depends on more than just having a large and sound economy. Lenders will believe they are likely to be repaid only if the government has the ability to generate revenues from that economy. The public finance system ultimately rests on the ability to levy and collect sufficient taxes to service the debt. This was a crucial lesson of the War of 1812. As Treasury Secretary Dallas said near the end of the war, the government’s fundamental problem was the “inadequacy of our system of taxation to form a foundation of public credit, and the absence from our system of the means which are the best adapted to anticipate, collect, and distribute the public revenue.”

The ideas that a government should always pay its debts and that good credit is crucial to national power may seem uncontroversial. But one person’s interest payments are another person’s taxes, so making those payments requires the political will and the popular legitimacy to raise and collect taxes. This was the fundamental source of Great Britain’s power in the eighteenth century (until the Industrial Revolution made it also Europe’s economic powerhouse), and Hamilton consciously attempted to mold the United States in the British model.

Jefferson, Madison, and Gallatin also believed that debts should be paid, but it was not until the War of 1812 that their party became reconciled to the need for new taxes to finance emergency borrowing. And after the war, in 1816, a Republican Congress chartered the Second Bank of the United States, following the blueprint drawn by Hamilton. Fiscal prudence and restrained government were certainly part of the American system of public finance established in the late eighteenth and early nineteenth centuries. By today’s standards, even Hamilton would probably qualify as a fiscal conservative; the idea that the budget should ordinarily be balanced (barring a national emergency, of which war was the only known example) was virtually unquestioned. (State governments, by contrast, often over-borrowed and occasionally defaulted in the early nineteenth century; over time, they have generally imposed constraints on themselves to prevent taking on too much debt.) But the ability to raise taxes when necessary to service and pay down the debt— and, eventually, the government’s consistent track record at doing so— was what made it possible to maintain the country’s good credit even amid adversity. When it came to public finance, the United States successfully emulated the model of Great Britain, not that of pre-Revolutionary France.”

(Johnson, Simon; v (2012-04-03). White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You (Kindle Locations 607-625). Knopf Doubleday Publishing Group. Kindle Edition.)

Asking for a blank check in the form of a debt ceiling increase with no strings attached demonstrates a significant lack of accountability or planning on how the debt will be repaid. A bank would never give a company a loan without knowing that it could be paid back and how the business will create profits to make its’ payments. We should not endorse more debt without commensurate real spending cuts. If we continue down the path we’re on, we’ll eventually run out of credit and then we’ll learn pretty quick on how little we can live.

Bill English, CEO