Broken but Fixable Precommitment
Right now, you can pick up any newspaper and find political grandstanding regarding the Debt Ceiling. Devised in 1939, it was an initial and well meaning attempt by the US government to force spending restraint upon itself. By law, the government could borrow this much and no more - a line was drawn in the financial sands. Good idea, unless you can repeal or change the law whenever you want, which of course the government can. It took only two decades before the Debt Ceiling was officially described as "a meaningless strait jacket
." Like an alcoholic leaving the key in the liquor cabinet, politicians have voted away their previous debt resolutions and installed a new higher limit, hundreds of times already, though undoubtedly each increase was going to be "just this once." What is remarkable about this latest increase is the level of debate around it.
Given that the Debt Ceiling is a leaky roof, the present situation is predictable and was repeatedly predicted. I wrote this excerpt from The Procrastination Equation a few years ago: "By the time you are reading this book, it will be even worse. The United States, for example, will likely have finally hit the 100 percent mark, the point where it owes everything it makes in a year... How did we get so deeply in debt? Governments display the same intention-action gap that defines all procrastinators; they form intentions to stop spending but change their minds when the moment to act is upon them." Looks like I was bang on the money.
In the 70 years since the Debt Ceiling's inception, we know now how to patch its holes. It's an example of a well-studied, self-control mechanism called precommitment, which means acting now to prevent ourselves from acting otherwise later. For example, revelers who don't want to overspend precommit by leaving their credit cards at home and take only cash. It can be used successfully by governments as well. Canada has kept its own social security program solvent through the effective use of precommitment; the Canadian government simply can't get their hands on this dedicated money.
Here is a list of six refinements to the Debt Ceiling based upon a modern understanding of human nature and precommitment. This is also what the U.S. Founding Fathers intended. James Madison, the Father of the Constitution, wrote "It may be a reflection on human nature, that such devices should be necessary to control the abuses of government. But what is government itself, but the greatest of all reflections on human nature?"
1. Express The Debt Ceiling in Terms of Percentage of GDP: Expressing debt in absolute terms, such as $14.3 trillion, makes sense only if the economy doesn't grow. The amount of debt a country can incur should be in proportion to how much wealth it generates, a debt-to-GDP ratio. It's exactly the same principle bankers apply to us when we seek a loan - the more assets you have, the more you can borrow. By using a debt-to-GDP ratio, it ensures we don't get into the dangerous habit of mindlessly raising the Debt Ceiling simply to keep pace with a growing economy. We don't want to make any changes to the Debt Ceiling habitual; it should be a well publicized exception.
2. Set the Debt Ceiling Conservatively Low: Some debt is reasonable but it is hard to establish how much. The economists Carmen Reinhard and Kenneth Rogoff estimate we enter a danger zone when the debt-to-GDP ratio hits 90%, regrettably a tipping point the U.S. has already past, but let's leave some wiggle room. I would argue for 50%.
3. Make it Progressively Harder to Raise the Debt Ceiling: Abraham Lincoln is credited with stating "The Constitution is not a suicide pact." Accordingly, we can't lock ourselves into a Debt Ceiling entirely as we have to have some flexibility in case of an emergency or disaster. But we can't make it too easy either. If there is a need to raise it above 50%, greater agreement should be required. A one-to-one tradeoff is a starting point, so to raise debt-to-GDP ratio to 60% requires a 60% majority and to 70% requires a 70% majority. If there truly is an emergency, it should be big enough that most politicians regardles of their stripe can recognize it.
4. Make it Hard to Keep The Debt Ceiling High: Once a higher Debt Ceiling is established, it doesn't automatically stay there. It needs to be voted on and reconfirmed yearly.
5. Give Motivation To Reduce Debt: Reduce the pay of each senior elected official to the degree the Debt Ceiling stays above 50%. I would suggest a 2% reduction in salary for each percentage point increase in the debt-to-GDP ratio. Consequently, if the debt-to-GDP ratio ever reaches these commanding heights once again, the House, the Senate, and the Executive would be paid almost nothing. Tell me this won't be motivating.
6. Maintain Attention: The U.S. National Debt Clock moved from Times Square to the Avenue of the Americas in 2004. Move it once again, this time into the House of Representatives and display the Debt Clock prominently above the mantel, that is above the Speaker's chair. Recycle those now defunct terror color-codes from Homeland Security. As the debt-to-GDP ratio gets larger, the numbers stop glowing green and move up though orange and red.
Each of these refinements is based upon a solid and modern understanding of human nature. It would be absolutely astounding if these updates didn't work. The alternative to revising the Debt Ceiling is really the status quo as the default is even more debt. Is anyone really saying "Hey, it hasn't worked in the last 70 years but let's give it another 70 more"? Consider the words of George Washington: "Indeed, whatever is unfinished of our system of public credit, cannot be benefited by procrastination; and, as far as may be practicable, we ought to place that credit on grounds which cannot be disturbed, and to prevent that progressive accumulation of debt which must ultimately endanger all governments." Given that he spoke this in 1794, this must be the world record for longest bout of procrastination (and counting), but it isn't a record to brag about.