The vast majority of Americans are likely unaware of it, but the U.S. Treasury blew past the country’s statutory debt limit quite a while ago – in mid-March – in fact. That means that since then, and for several months into the future, the Treasury has been and will be relying on what are called “extraordinary measures” to pay the government’s obligations.
It’s a term that has become plainly ridiculous in recent years because the number of debt ceiling crises lawmakers have forced the country into have made such measures, such as delaying required pension fund payments, anything but extraordinary.
When Congress comes back next month, there’s a good chance that lawmakers and the White House will face off over federal spending once again, taking the Treasury to the brink of default before finally agreeing on a deal to raise the debt limit.
Many of the arguments that those opposed to any sort of debt limit will marshal focus on the pernicious effects of an escalating national debt on the country’s economy. There’s no doubt that it’s better to have less debt than more, all things being equal. But in a recent paper published by the Brookings Institution, Kemal Derviş makes the important point that not all debt is created equal.
Derviş, the director of Brookings’ Global Economy and Development program as well as the former minister of economic development for Turkey, points out that it can be misleading to talk about a nation’s debt as though all borrowing is the same. Instead, he argues, countries might be better off looking at their assets and liabilities the way companies do.
“It is a mistake to focus only on annual budgets, without adequate regard for the long-term balance-sheet implications of how borrowed money is used,” he writes. “This narrow, short-term focus differs from the approach taken for publicly traded companies, for which the strength of the balance sheet and the economy’s potential are emphasized, alongside annual income statements.”
Investments in infrastructure and education, for example, have a positive return to the government’s balance sheet because they boost the GDP and tax revenue. However, he notes, recognizing that would require politicians to alter the way they talk about government borrowing.
“For a long-term balance-sheet approach to gain traction, politicians will have to drop the ideological biases that are distorting fiscal policy. Proponents of austerity currently use nominal debt figures to scare voters, even in countries with record-low interest rates and large private-sector profits that are not being channeled toward investment.”
Derviş’s arguments are generally aimed at European policymakers, but they are clearly applicable to the U.S., especially given the fact that the Treasury continues to be able to borrow at rates that are historically low.
“In many countries, one could realistically expect a 4 percent average return on at least one percentage point of GDP worth of incremental investment. If the marginal real interest rate is 1 percent, an increase in public investment would actually reduce future indebtedness.”
The existing federal debt of the U.S. is substantial, totaling some $18 trillion. Dervis doesn't advocate adding to the debt without considering the cost, but argues that while a reflexive objection to any borrowing at a time when it is possible to lock in low rates for extended periods of time may make political sense, it is difficult to defend from a fiscal point of view.
The unfortunate truth is that persuading the public that some borrowing can actually reduce future debt is a political bank-shot that few politicians have the will or the ability to sell. For the American people, the likelihood of a debt crisis that treats all borrowing as equal is the likeliest outcome when Congress returns in the fall.