Thursday, March 3, 2011

The Debt Limit is Obsolete

As I discussed yesterday, the debt limit is the congressional limitation on the amount of bonds that the U.S. treasury can have outstanding at a given time.  Two significant things happened in the 1970s that made the debt limit obsolete.  One is the Congressional Budget and Impoundment Control Act of 1974.  It formalized the budget process for the president and congress.  And even though it's been amending several times, the current budget process still uses the same blueprint.  Also, the United States went completely off the gold standard in 1971.

At the time when it was first created, having a debt ceiling made sense.  It put a check on the executive branch to keep it from spending and borrowing without regard to congress.  It also protected our Gold Reserves from being over leveraged.  Gold Reserves were extremely important because we were (for the most part) on a gold standard so that the dollar could maintain value at home and overseas.  These two reasons for maintaining a debt limit no longer applies.

The Congressional Budget and Impoundment Control Act of 1974 created a new check on executive power.  It laid out a formal budgeting process that must be passed by congress every year.  Otherwise, the government must "shutdown" until congress acts to re-instate it.  Also, by statute, the President could no longer refuse to use or try to shift unused funds from one area of government to another.  Funds allocated by congress to build a road must be used to build that road or the President and executive branch would be committing a crime.  This budget process provides sufficient check on the executive branch from trying to (legally or "semi-legally") re-allocate congressional funds.

In 1971, the United States went off the Gold Standard and never looked back.  Unlike past times when the U.S. went off the gold standard, it wasn't temporary.  While there is a group advocating to go back to the gold standard, it's small and doesn't have a lot of momentum behind it.  For all points and purposes we are no longer on the gold standard and won't be going back.  So what this means is that o matter how many dollars are issued by congress, treasury, or the Fed, they cannot be redeemed for anything but more dollars.  While that has several implications, but none of them is the possibility of any bank losing gold reserves.
So what does it all add up to?  The debt limit has lost its usefulness.  The only purpose it serves is one more thing congress has to do when budget deficits increase.  You might say it offers a chance to get the public and congress to face large budget deficits.  However, that already happens every year thanks to the yearly budget process.


Congress should "raise" the debt limit one last time, but instead of raising it just eliminate it.  If removing it does create a problem, congress can always add it back.
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