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An economist's case for abolishing the debt ceiling

MICHEL MARTIN, HOST:

The U.S. reached its debt ceiling earlier this week, and now Treasury Secretary Janet Yellen has had to resort to so-called extraordinary measures so the government can continue to pay its bills. But that will only work until the first week of June. If Congress fails to raise the debt limit before then, it will result in a debt default, and that could have terrible consequences for not just the U.S. economy but the global one. So now the country's likely facing months of wrangling between House Republicans and the Biden administration over government spending and other issues.

So now you might be asking, why? Why do we go through this every couple of years? Our next guest says, good question - and just one reason she thinks Congress should abolish the debt limit. Louise Sheiner is an economist who previously worked at the Federal Reserve and the Treasury Department. She's now a senior fellow at the Brookings Institution, a think tank in Washington, D.C., and she's with us now to tell us more about why she says that. Louise Sheiner, welcome. Thanks so much for joining us.

LOUISE SHEINER: Thank you for having me.

MARTIN: Could you just briefly tell us what exactly the debt ceiling is? And why do we have one in the first place? It's my understanding that the U.S. and Denmark are the only countries in the world that have a defined debt ceiling like this. So why do we have it?

SHEINER: So the debt ceiling is a legal limit on how much debt the Treasury can have. So it puts the limit on borrowing. When you hit that debt limit, the Treasury cannot increase its borrowing. And actually, the history of why we have it - it was first implemented around World War I. Before that, every time the Treasury wanted to borrow, it actually had to get approval from Congress. So Congress was managing the debt, not Treasury. And that proved unworkable. And so the debt limit was actually a way of giving Treasury more discretion. Oh, you can manage the debt as long as you don't exceed this amount.

MARTIN: So last year, you testified before a House committee advocating for the elimination of the debt ceiling, and you had three major reasons why. You said the debt ceiling doesn't serve any useful purpose. You said, we don't know what would happen to interest rates in the standing if Congress somehow failed to raise the debt ceiling, but we do know the effects would be negative. And you said that the country faces a lot of long-term economic challenges and that bickering over the debt ceiling is basically a waste of time and energy. It doesn't serve any useful purpose. So just walk me through those, you know, one by one, I mean starting with the first one, that it doesn't serve any useful purpose - but one of the things Republicans argue is that they don't really have any other mechanism to limit federal spending, that this is really the only tool they have.

SHEINER: Right. So, first of all, obviously, that's not the only tool they have. Congress passes legislation. That is part of a political process. But the resulting legislation from that process is what really determines taxes and spending. The debt ceiling doesn't, right? That's the thing to really remember is if you don't raise the debt limit, you are not going to, in any kind of long-run sense, affect spending of revenues. You're not going to affect the level of debt because eventually, it's going to be paid. This is going to be had to resolved. The only way to change the level of the debt is to change your tax revenues that are coming in or your spending that's going out, and that requires direct legislation on those elements.

And I think the evidence suggests that, really, the debt ceiling has not had a disciplinary effect on the budget. It really is used more, I think, as a political football than as a really intentional way of addressing our long-term challenges. And that goes to that - my final point - I'm going to skip the order - because we do have long-term fiscal challenges. We have other challenges as well besides fiscal challenges. We have, you know, high levels of inequality. We have limited economic mobility. We have slow productivity growth. We have to deal with climate change, with health care costs.

We have a lot of challenges. And the way for Congress to address those challenges is in a serious, deliberative manner where they really think carefully about what we're going to do. It's not about sort of saying, oh, my God, you better do something right now. And otherwise, we're going to, you know, let the U.S. government default on its obligations.

MARTIN: Well, let me just ask you this, though - the Democrats obviously say that Republicans are hypocrites. They only care about the debt when Democrats hold the White House. The point being, you know, the Trump tax cuts, for example...

SHEINER: Yeah.

MARTIN: ...Increase the debt tremendously. There was no objection to that. But even having said that, when Democrats have had both houses of Congress and the White House, they didn't do anything about the debt ceiling. Why haven't they?

SHEINER: People think that when you raise the debt limit, you are the one who has agreed to raise the debt, right? And so then you're accused of having sort of - you're squandering our future, squandering our children's future. But that's not the case. So raising the debt ceiling now is in part sort of paying the debt as the result of the Trump tax cuts. And everything else that Congress has done, right? It's just basically saying, you already passed this legislation, and so we're going to pay for it. But it's not understood that way. So it's used as a political cudgel, so nobody wants to do it. I mean, I wish that the Democrats had been able to get rid of the debt ceiling, but I think they didn't have the votes to do it, because, again, you can imagine that their worry is then forevermore, they said, you're the ones who sort of allowed the debt to increase because you got rid of the debt ceiling.

MARTIN: What would you advise if you had the opportunity to advise the president or House Speaker McCarthy right now? What's the one thing you think that both of them should know?

SHEINER: I think it's important that they understand and make it clear to the public that the federal government will pay its obligations, that when you undermine that view, when you basically put that at risk, that is costly for the economy. It risks having, you know - the U.S. Treasuries are viewed as the most safe and liquid securities in the world. That lowers our borrowing costs. It makes our economy stronger. And sort of using that as a way of getting political leverage is not the right way to go. That is risking our position in the global economy, as the global leader in the economy, for sort of political infighting that can better be addressed in other ways.

MARTIN: And what about the public, I mean, who may be listening to this conversation? What do you think is the most important thing for them to know? Because, look. Let's just assume that some members of Congress are just, you know, heat-seeking missiles. OK. They'll do whatever gets them the most clicks or attention. But let's assume that some of these people, even people who are engaging in conduct that other people consider reckless, think they're doing this on behalf of the people who elected them, because that's what the people who elected them want to see. They want to see them cut government spending. They say, this is what we went there to do. We're going to do it. And if this is how we have to do it, fine. What is it that you think their constituents should know?

SHEINER: So I think two things. One, as we said before, not raising the debt limit doesn't cut government spending. All you're doing is sort of holding the economy hostage and saying, if I don't get my way, whatever that is, then you know, I'm going to let the U.S. government default on its obligations. I think No. 2 is that we do have long-term problems. We do have to address them. Those long-term problems include the fiscal challenges we have. We have high deficits that are projected to grow over time.

There are other economic problems we face as well. And in order for Washington to work for people, it has to sit down and understand the policies and have a deliberative process where it comes up with the best resolution. You know, cutting spending is fine in theory, but you have to cut spending - the right spending. You have to balance spending and taxes. You have to think about our other problems. And trying to get sort of leverage this way is not the way to get there.

MARTIN: That was economist Louise Sheiner. She's worked at the Federal Reserve and the Treasury Department. She's now the policy director for the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution. That's a research and advocacy organization in Washington, D.C. Louise Sheiner, thanks so much for sharing this expertise with us.

SHEINER: Thank you. It's been a pleasure. Transcript provided by NPR, Copyright NPR.