The debt ceiling. Who needs it?
If the federal debt cap actually kept spending in check, it might be worth the hassle. But it doesn't, and it's not.
NEW YORK (FORTUNE) - For the fourth time since he became president in 2001, George Bush has sent his Treasury secretary to Capitol Hill, hat in hand, to ask for an increase in the federal debt ceiling (currently $8.18 trillion).
As lawmakers hem and haw, the Treasury Department is raiding the civil service retirement trust fund to pay the government's bills. If Congress fails to act before it goes on recess next week, it's possible that the United States will default on its obligations -- rocking global financial markets and possibly leaving Americans stuck with higher interest rates for decades to come.
Outrageous, isn't it? But which is the most outrageous part: That the current president and Congress don't seem interested in even trying to balance the federal budget, or that the United States regularly risks default because of an arbitrary ceiling that bears no relation to the nation's ability to service its debts or its true long-term fiscal obligations?
If the debt ceiling actually served to keep spending and borrowing in check, then it might be worth the hassle. But there's no indication that it does. The ceiling was first set in 1917 at $11.5 billion, and has been raised more than 70 times since. In the meantime, the United States has piled up an ever-larger (with some major ups and downs through the decades) nominal debt and yet somehow avoided financial ruin.
The measure of government debt watched by people in financial markets is not a nominal dollar figure but a percentage: the debt held by the public (as opposed to debt held by other branches of the government, chiefly the Social Security trust fund) as a share of gross domestic product. Right now that comes to 37 percent in the United States, up from 33 percent when Bush took office, but well below the 49 percent of 1993 to 1995. It's also lower than the debt/GDP ratios of Germany, France and Japan.
What's an appropriate debt/GDP ratio? The best-known benchmark has been the 60 percent Maastricht upper limit for countries hoping to adopt the Euro. But John Chambers, chairman of the sovereign rating committee at Standard & Poor's, says that economic stability and good government policies count for as much or more in credit ratings as the debt/GDP number.
The U.S. scores high in both those categories, and is one of two-dozen countries whose government debt gets S&P's highest rating, AAA -- despite a debt/GDP ratio slightly above the AAA average.
So yes, the nation's fiscal position has worsened significantly during the Bush presidency, and for that the president and Congress deserve to catch flak. But those who yelp about "record" deficits and "record" debt and imminent bankruptcy are blowing smoke. "The fiscal debt of the U.S. is not at an alarming level," S&P's Chambers says.
What is alarming is the projected long-run funding shortfall in Social Security, Medicaid, and Medicare (especially Medicare) -- which doesn't show up in today's budgets and isn't subject to any kind of legal ceiling. Estimates of its size, expressed as the present value of future unfunded obligations, go as high as $98 trillionómany times the current GDP of $12.5 trillion.
President Bush and the Republican Congress made this looming shortfall worse by enacting a Medicare drug benefit in 2003 without coming up with any money to pay for it, but the bulk of it is the result of decades of bipartisan effort (or lack thereof).
Presumably, none of this will be discussed as Congress debates the debt ceiling this week. Which is probably the best indication that the debt cap is pointless.
Plugged In is a daily column by writers of FORTUNE magazine. Today's columnist, Justin Fox, can be reached at email@example.com.