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The Debt Ceiling: Scrap It or Adopt the Danes’ Great Approach

Debt-ceiling silly season has returned, my latest post for the US News & World Report Economic Intelligence blog warns.  By late fall, we’ll face another dangerous political showdown on raising the debt ceiling to prevent a first-ever U.S. default.

Brinksmanship in 2011 over raising the debt limit started us on the road to the harmful across-the-board sequestration cuts, and there’s no telling what bad ideas policymakers may adopt this year to secure the votes needed to raise it again.

We’d be better off scrapping the debt ceiling entirely.  But the next best move would be to copy Denmark, the only other developed country with a statutory debt limit anything like ours.  As I explain:

There’s a crucial difference, however, between our debt limit and Denmark’s: the Danes do not play politics with theirs. . . .  When the financial crisis caused a sharp increase in government debt in 2008-2009, the Danes raised their debt ceiling — a lot.  The 2010 increase doubled the existing ceiling, which was already well above the actual debt, to nearly three times the debt at the time.  As [the Peterson Institute for International Economics’ Jacob Funk Kirkegaard reports, “The explicit intent of this move — supported incidentally by all the major parties in the Danish parliament — was to ensure that the Danish debt ceiling remained far in excess of outstanding debt and would never play a role in day-to-day politics.”

Click here for the complete post.