Economy

Budget experts say prolonged debt-ceiling debate a ‘big mistake’

by Vicki Needham - 01/22/13 9:52 PM ET

Prolonging a debt-ceiling debate could be catastrophic for the U.S. and world economies and should be off the table for negotiation, some budget experts argued on Tuesday.

Economists and policy experts argued that rehashing the debate in the summer of 2011 is the wrong approach and that Congress needs to ensure that increasing the limit doesn’t caught up in a net of other larger issues such as tax and entitlement reforms that could hamper, at least, an increase.

Simon Johnson, an entrepreneurship professor  at the Massachusetts Institute of Technology, told members of the House Ways and Means Committee that it is “ridiculous” and a “big mistake” that lawmakers are again having a conversation about raising the debt ceiling that is resembling the posturing of previous debates, which led to a downgrade in the nation’s credit rating.

Johnson argued that continuing to create a confrontation over the nation’s $16.4 trillion debt limit creates “uncertainty for everyone” from the private sector to consumers and the economies of Europe, which are still struggling to recover from their own financial crises.

“They can’t make decisions if don’t know what’s going to happen,” said Johnson, the former chief economist of the International Monetary Fund.

{mosads}If debt ceiling is only increased in short bursts, he said, the economy will continue to experience large spikes in uncertainty that “undermine” business investment and job growth, and will have a ripple effect that will stymie economic growth.

“So, take the debt ceiling off the table. Do it for our sakes, the world economy and the global financial system,” he said.

Panel Republicans battered Democrats and President Obama over the growing debt, arguing that he hasn’t demonstrated the leadership to slash the debt through deficit reduction.

Treasury Secretary Timothy Geithner has informed Congress that he is taking extraordinary measures in spending about $200 billion to ensure there is enough money to pay the nation’s bills through mid-February.

Bill Hoagland, a long-time Senate budget staffer who is now with the Bipartisan Policy Committee, argued that any delay in payments would eventually snowball and become “catastrophic.”

To regain sustainability, he suggested that the president submit a budget, the House and Senate approve their budget resolutions and lawmakers come to an agreement that would include reconciliation language to get the debt under control.

He relieved Obama of some of the pressure put on him by the GOP as well, arguing that nation’s current debt is a “result of obligations incurred long before he was president of the United States.”

“The goals for our country should be to spur economic growth and control our debt and deficit going forward,” he said.

“I am concerned that a prolonged dispute over the debt limit could, in fact, produce the opposite effect.”

He said a BPC analysis estimates that the debt limit event of 2011 cost the U.S. taxpayer an additional $19 billion over 10 years from the interest rate premium that the federal government was forced to pay on its debt during that period. 

Hoagland also pointed out that House Budget Committee Chairman Paul Ryan’s budget, approved last year by the House, showed the debt ceiling increasing to $17.1 trillion.

J.D. Foster, a senior fellow in economics of fiscal policy at the Heritage Foundation, characterized a debt-ceiling increase as a “forcing moment” when Congress should take the opportunity to make crucial budget decisions to lower the debt.

A House Republican bill to suspend the debt ceiling through May 19 was picking up momentum on Tuesday ahead of an expected vote on Wednesday.

The White House expressed support for the GOP measure, and backing was expanding in the Senate on Tuesday.

Hoagland told panel Chairman Dave Camp (R-Mich.) that Congress has provided a short-term extension seven or eight times in history and has attached policy reforms, including 1985 Gramm-Rudman-Hollings legislation.

But Johnson questioned how long Congress would be willing to go through the motions of short-term deals — “until you have another election?”

So while the debt-ceiling increase is a possible vehicle for deeper spending cuts, Hoagland said the sequester could be modified to not only expand cuts on discretionary spending but include deficit reduction of mandatory spending, where rising healthcare costs are weighing on the system.

He suggested that when looking to cut costs, policymakers must examine the healthcare delivery system.

His group is coming out with a report in the middle of March that will examine how to make changes to the healthcare payment system, the crux of which most lawmakers and experts argue is responsible for a sizable portion of the debt.

“You have to focus on healthcare costs,” Johnson told the panel.

The bill up in the House on Wednesday also would withhold lawmakers’ paychecks until each chamber produces a budget.

House Minority Leader Nancy Pelosi (D-Calif.) has criticized the GOP measure as a gimmick and called for a longer-term extension of the debt limit.

On Monday, Senate Majority Whip Dick Durbin (D-Ill.) said Republicans should stop “playing games with the debt ceiling” in response to a proposal to raise the limit for three months.

“If we want businesses to make investments, we can’t keep doing this, we need certainty,” he said.

Tags Dick Durbin Paul Ryan