An Analogy for the Debt Limit

Given the likelihood of a debt limit showdown, I'd like to outline my views on the subject.

We hear a lot of analogies on the debt limit, most of them about why it should stay low.  The most common example is this: if you already owe $10,000 in loans, you shouldn't borrow another $20,000 to pay it back.

Unfortunately, this fails to adequately capture the situation.  A better analogy, to my mind, is this; the budget is like a home contract, the debt limit the loan for the property.

Let's say you're selling a house, and someone wants to buy.  You haggle a bit, and eventually settle on a price, let's say $500,000.  The buyer signs the contract, agrees to pay on such-and-such a date after moving in, and everything looks swell.

Now, let's suppose the payment due date rolls around, but the buyer tells you, "I only have $100,000 in the account.  Take it or leave it."  When you demand to know why he can't pay the full $500,000, he replies "I don't want to take a loan."  Not "I can't take a loan," but "I don't want to take a loan."

Obviously, as the seller, you're steaming mad now.  This man signed a contract, moved into your house, and now he's saying he won't--not can't, won't--pay his bill.  In fact, you can sue the guy, and any reasonable court would rule in your favor; the man broke his contract, and he's on the hook for the other $400,000.  If he needs a loan to find it, he'd better take the loan.

Here's how this relates to the debt limit.  When Congress passed the budget, it essentially signed a contract saying "I will pay X amount of money to creditors and agencies Y."  By signing that contract, Congress has committed to paying.  The debt limit is the loan that allows Congress to pay.  It's all very well to argue that we can't go deeper in debt--that is an argument that needs to be had--but Congress has already agreed to pay the money, so it needs to find that money from somewhere.  If the only way to find the money is to borrow, we had best borrow.

Okay, so question: when should we have the spending and revenue debate?  When we pass the budget.  The budget sets how much money we spend, how we spend it, and where it comes from; as such, we get to debate those things when we pass the budget.  However, once the budget is set, we are going to spend the money one way or the other--we've contractually agreed to do so--so having this debate after the budget passes serves no purpose.

In sum, here is the situation on the debt limit and why holding it hostage is the height of stupidity:

• We've already set our spending levels, so not raising the debt limit won't affect spending one red cent.
• We've already set revenue levels, so keeping the debt ceiling won't magically generate revenue.
• By not raising the debt ceiling, we essentially say, "We don't like these bills, so we won't pay them," even though we have already legally agreed to pay them.  That's called a default, it's illegal, and it casts doubt on the security of U.S. bonds.
• The world considers U.S. treasury bonds the safest investment.  Throw the world's safety net into doubt, and we risk a financial and economic crisis that makes 2008 look like a mouse against a tiger.

In short, there is absolutely no advantageous effect for anyone from not raising the debt ceiling, and catastrophic results for everyone unless we do.  So holding it hostage is moronic; sooner or later, the bluffer has to blink.