Don’t Hold the Debt Limit Hostage to Deficit Reduction

With the House voting today on a plan to temporarily suspend the debt limit, we’ve updated our paper that clarifies the debate.  Policymakers should not play politics with the country’s ability to pay its bills:

[L]awmakers should not hold the debt limit hostage to deficit reduction measures of their choosing or increase uncertainty and heighten the risk of default by raising the debt limit for only a few months at a time.  Policymakers cannot let the government default and shouldn’t create any doubt or uncertainty about that.

As we’ve explained in the past, the most sensible approach would be to abolish the debt limit altogether because it serves no useful purpose and it provides opportunities for political mischief while putting the nation’s financial standing at risk.  We’re in good company.  The Financial Times and the Economist have written the same, and most recently, economists surveyed by the University of Chicago overwhelmingly agreed that the debt ceiling “creates unneeded uncertainty and can potentially lead to worse fiscal outcomes.”

At the very least, lawmakers should raise the debt limit in a timely way and for an extended period of time so that the government does not default or risk defaulting on its obligations, potentially causing a host of serious problems.  Acting otherwise would be, as Simon Johnson, MIT professor and former chief economist of the International Monetary Fund, puts it, “playing with fire.”

Click here to read the full paper.