Moodys: Dump the debt ceiling

Moody’s, a premiere bond rating agency, has at least a novel approach to the debt-ceiling debate:

Ratings agency Moody’s on Monday suggested the United States should eliminate its statutory limit ongovernment debt to reduce uncertainty among bond holders.

The United States is one of the few countries where Congress sets a ceiling on government debt, which creates “periodic uncertainty” over the government’s ability to meet its obligations, Moody’s said in a report.

“We would reduce our assessment of event risk if the government changed its framework for managing government debt to lessen or eliminate that uncertainty,” Moody’s analyst Steven Hess wrote in the report.

It’s not an entirely ridiculous suggestion.  After all, Congress has the power on its own to spend only the revenues it receives in each annual budget.  If they want a limitation on debt, they can simply pass budgets that don’t require the Treasury to sell bonds at all.  Passing a budget with a $1.6 trillion deficit more or less requires Treasury to find the money somewhere; why not just treat the budget as a self-defining debt ceiling for the year?

However, that’s not exactly what Moody’s meant with its proposal.  Instead of defining borrowing limits, Moody’s would prefer that Congress set statutory limits on total debt rather than short-term borrowing targets:

“Elsewhere, the level of deficits is constrained by a ‘fiscal rule,’ which means the rise in debt is constrained though not technically limited,” Moody’s said, adding that such rule has been effective in Chile.

It also cited the example of the Maastricht criteria in Europe, which determines that the ratio of government debt to GDP should not exceed 60 percent.

Well, the Maastricht criteria is mostly notable by the manner in which Europe ignores it — which is one reason why the short-term limits are valuable.  Chile has had more success with self-discipline in its legislature, but Europe and the US have not.  Having the short-term limits means short periods of uncertainty over whether the US will make its interest payments on existing debt on time, but it also allows for hard targets to get issues of spending and revenue into high-visibility public debates.  Without the debt limit, budget debates in most years would be limited to wonk circles and early-morning panel shows on NPR and C-SPAN.  For a federal government with such a proven lack of discipline, short-term hard targets really are necessary, regardless of the angst it provokes in bond markets.

On the other hand, the passage of the Balanced Budget Amendment would satisfy everything Moody’s demands.  It sets a hard target for federal government spending, requires a budget that balances each year, and restricts tax increases through supermajority votes in order to keep Congress disciplined with the public purse.  It will take a while for such an amendment to get ratified if Congress has the courage to pass it, so it’s not a solution to the present acute crisis, but it’s the solution to the long-term crisis that faces us now.