What could possibly trigger me enough to break a two-year blogging hiatus? A sudden burning desire to consider the difference among budget accountability, debt accountability, and the inane, moronic, irrational, exploding human appendix ****show that is the debt ceiling.
- Budget accountability is essential. That is why the U.S. Congress authorizes various parts of the U.S. government to do and buy things and, separately, appropriates resources to pay for those things. These resources might come from some combination of three buckets: (1) taxing people/things/activities, (2) selling stuff, or (3) borrowing. The government is and should be accountable for how it fills these buckets (see here for more). But let us consider bucket No. 3, public debt, more closely.
- Public debt accountability is essential-for Argentina, Japan, Mozambique, Ukraine, and the United States alike. Borrowing binds current and future citizens to pay taxes or forgo public services, if need be, to pay back the debt. At the barest minimum, a government that borrows a bajillion tokens and pledges all of the country's mineral resources to build a golden statue of its president on Mars must face a credible threat of getting booted out of office. #PublicDebtIsPublic
- Debt accountability takes different forms around the world. In a few countries, the legislature must approve every borrowing in advance. More commonly, legislatures approve annual or multiyear borrowing programs, sometimes subject to treaty or constitutional limits, such as the EU's much-debated treaty debt cap of 60% of GDP for member states. In most countries, there is also reporting to the legislature and/or the public after the fact.
- But the rationale for debt accountability goes beyond concerns about future taxes and services, in important part because government debt functions go beyond funding the government. U.S. government debt in particular has more functions than most. It is a basic building block of U.S. and global financial systems--U.S. Treasuries are to finance today what carbon is to carbon life forms--and, as a result, has a bigger and broader set of stakeholders. Assets around the world are priced relative to the Treasuries. Banks and institutional portfolios are built on the premise that U.S. government debt is "risk-free." Central banks around the world hold piles of U.S. Treasuries for reasons ranging from self-insurance to currency management. To be sure, not all stakeholders are entitled to the same degree and kind of debt accountability as the citizens bound to repay the debt. On the other hand, most find ways of holding the debtor accountable, including but not limited to selling the debt, charging higher interest rates, suing the debtor, yelling at the debtor's ambassador, or going to war. (That last one is rare.)
- The crazy thing about the U.S. debt ceiling is that it achieves NEITHER budget NOR debt accountability. As everyone everywhere has said and written already, budget accountability happens when the Congress votes on the budget, which effectively locks in how much the United States would have to borrow to pay for all that (this is a nice overview). If you wanted to have a debt ceiling, you would have it kick in at budget vote time. And it sort-of-kind-of used to work a little like that in the olden days, when the Congress had to give Treasury permission each time it wanted to borrow. One very useful account describes it as a project finance approach to debt management. You want to borrow money to build a bridge? You need to get the bridge and the debt authorized at the same time.
- The trouble is that, if your debt management entails constantly rolling over your maturing debt, then getting permission to borrow each time gets very clunky, and your debt's prospects of becoming a global reserve asset grow dim. Debt production has to be a well-oiled, predictable machine for the debt to function as money.
- After World War I, the U.S. government increasingly shifted to regular auctions to sell its debt, and by 1941, the Congress dispensed with individual borrowing authorizations, replacing them with the aggregate nominal debt limit ... THEREBY breaking the link between budget and debt accountability.
- Severing the link between budget and debt accountability need not mean abandoning either or both. You could still have the Congress vote on the budget (as it does), demand to know how it would be paid for, and establish a rational debt accountability scheme based on some idea of how much debt is too much. Whether that would be debt/GDP, debt service/revenues, or another metric is beyond the scope of this rant, and in any event a big topic for policy economists to debate. The one certainty is that a simple number, disconnected from any reference frame whatsoever for the economy's output, growth or revenue path, is meaningless. Yes, all those debt clocks are completely, totally, shamefully meaningless.
Some might say that the debt ceiling nonetheless plays a useful role because, by holding the United States and much of the world hostage, it might force policy makers to confront the big taxing and spending questions that they would not deal with otherwise. The idea that hostage negotiations that risk triggering a cascade of financial crises around the world, and that may be harming U.S. credit now as we haggle, would somehow produce good fiscal policy ... strikes me as bizarre. Also sad.
But wait, others might say. Isn't this end-of-the-world talk all too much? Hasn't the U.S. Treasury missed payments here and there before, and the world did not end? (Best piece on that history here.) First, finance was smaller then. Second, for a chunk of that history, the Treasuries were more like a flitty radioactive isotope than the carbon of carbon life forms, so the stakes were correspondingly lower for the United States and for the world. But third, what would be the point of testing that proposition? Better debt management? Better budget management? Better government? None of the above? #DebtCeilingIsStupid