Both Democrats and Republicans are concerned with the growth of the federal debt relative to the growth in GDP. Consider an analogy to real estate. If one owns a house worth $100,000, borrowing $50,000 from a mortgage lender is unlikely to jeopardize one’s solvency. And if the value of the house increases to $200,000, borrowing another $50,000 would not be imprudent either. But suppose the value of the house remains unchanged, and still the borrower increases his borrowing from $50,000 to $100,000; his debt burden will have increased greatly. And likewise if a government increases its borrowing at a rate substantially in excess of the increase in government revenues as a consequence of economic growth or higher tax rates. It is burden, not amount, that is, or should be, the concern. And thus if interest rates are falling, the debt burden may not be increasing even if the amount of debt is increasing. But most federal debt is fairly short term nowadays, and thus the currently low interest rates are not locked in for long. If interest rates increase as the amount of debt increases (and those rates may increase for a separate reason—the greater the debt, which includes interest on the debt, relative to the borrower’s ability to repay, the greater the risk of default and so the higher the interest rate demanded by the lender), the overall debt burden will increase by more than the amount of borrowing increases.
The debt ceiling is not actually a ceiling on borrowing by the federal government. Rather, it is a limit on the amount of money that the Treasury can pay to meet its obligations, and thus to repay, or pay interest on, its borrowings. If the ceiling is low enough to prevent the Treasury from paying what it owes its creditors, the government is in default and interest rates on government debt are likely to soar.
The difference between our political parties is not that the Democrats want to “grow” the federal deficit faster than the economy is growing and that the Republicans want to shrink it. The Democrats want to reduce the deficit—everyone fears the impact of growing entitlement spending on the nation’s fiscal health—but mainly wants to do it, it seems, by increasing federal tax rates, while the Republicans want (or rather say they want) to reduce the deficit by reducing government spending. As Becker points out, if the method used to reduce the deficit is higher taxes, the debt ceiling has no effect. And as for reducing spending, that probably is politically infeasible, because the Republicans, though they say they want to reduce spending, don’t wish to touch entitlements (or at least social security and Medicare) or military or law enforcement expenditures; and there doesn’t seem to be much room as a practical and political matter for further economizing on other federal expenditures, which have already been reduced. Attractive reforms such as eliminating agricultural subsidies (importantly including the ethanol subsidy) do not seem to be politically feasible.
So a debt ceiling is unlikely to reduce the size of government. But it is pernicious, in inviting political
tactics that could well be thought to violate the Constitution, or at least the spirit of the Constitution. Republicans want to destroy, or in the short run greatly weaken, Obama’s health care law (“Obamacare”), even though it resembles a health care reform proposed by President Nixon and successfully championed by Mitt Romney when he was governor of Massachusetts. The Republican preoccupation with Obamacare is thus rather surprising, but may reflect a fear that when once Obamacare is debugged and up and running it will prove popular, which will boost the Democrats. Yet the Republicans are not in a position to repeal or even amend the law by constitutionally authorized means, because repeal or amendment would require a majority vote in both houses of Congress (actually a two-thirds vote in both houses, for given a lesser majority Obama could veto a repeal or amendment without fear of being overridden). The intention, which is contrary to the structure of the federal legislative process ordained by the Constitution, is to coerce Congress to repeal (or by amendments to defang) Obamacare by threatening to precipitate an economic crisis by refusing to vote for an increase in the debt ceiling. If the tactic succeeded, it would mean that a minority in Congress had succeeded in amending a federal statute.