Friday, July 29, 2011

The Debt Limit: Have We Ever Been on the Verge of Default Before?

The answer is yes. The closest we came during my time at Treasury was in November 1985. Treasury had performed some accounting maneuvers, including disinvesting some securities in the Social Security trust funds, but then it had indicated it was out of tricks. The November 15 interest payment date was looming. President Reagan was insisting on more than a small increase in the debt limit along with a Congressional commitment to balance the budget in five years. On November 14, the Congress passed an $80 billion increase in the debt limit, enough to last until around December 11, along with appropriation legislation funding the government until December 12. President Reagan signed it that night.

The linking of the debt limit with pressure to cut domestic spending sounds very familiar these days. Note though that we went right to the eve of an interest payment date in 1985. There was no payment prioritization, as it talked about now.

Reagan was a tough negotiator, but he knew when to compromise.

When people say that the all debt limit increases are routine, this is of course not true. Memories are short.

The latest fiasco, though, is good evidence why the debt limit should be repealed and the Treasury should simply be given authority to issue debt in order to keep the government funded, based on the tax and appropriation decisions of Congress and the effect of the economy on expenditures and receipts. Otherwise, we are likely to suffer self-inflicted wounds in the future, given our polarized politics.

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