A Plan to Renew the Promise of American Life, Plank 7
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Plank 7. Limit debt
Specific Recommendations
7.1. Return to the pre-1917 congressional practice of fully financing each new spending bill within its own text through spending cuts and tax hikes (pay-as-you-go) and ad hoc debt authorizations (borrow-as-you-go).
7.2. Repeal the statutory debt limit and allow the president to issue debt only under specific congressional authorization, bill by bill.
7.3. Establish, by constitutional amendment, an enforceable cap on total federal debt, defined in terms of a specific number of dollars. The amendment or amendments should do all of the following: (1) permit no federal spending beyond current receipts, except for amounts borrowed in strict conformity with the amendment, (2) provide that authorization for any borrowing above the debt cap requires the approval of a majority of the state legislatures in states representing a majority of the citizens of the United States, (3) enforce the cap with presidential sequesters and impoundments, (4) define the term ‘dollar’ explicitly, in an airtight way, so that the amendment cannot be evaded through redefinition (preferably just by reiterating the existing, implicit definition), and (5) punish any breach of the cap with strong, credible penalties for the federal officials responsible for the breach. A model for such an amendment is the Do Your Job Amendment.
7.4. If Congress refuses to originate the debt limitation amendment, originate it via the states through an Article V convention of states.
Comments
On our present course, our national debt will become unmanageable and trigger an economic crisis of historic proportions. This threat exists because we have forgotten fiscal common sense. We have abandoned the time-tested discipline of pay-as-you-go. If we fail to take action, our republic will suffer great harm.
The five rules of fiscal common sense are: limit spending, tax lightly, borrow the minimum, maintain a surplus, and pay down debt. Today, of course, our federal government does none of these things. And it will continue to do none of them until we change politicians’ incentives.
Excessive debt needs to become politically unthinkable. And that, I think, can only happen with a well-crafted constitutional amendment. We must, as it were, ‘bind men down with the chains of the constitution,’ and specifically with automatic penalties that are both effective and unavoidable and yet with enough flexibility to meet a true emergency. Threading the needle is not easy, but it is possible.
In 1798 Jefferson opined in a letter to a friend that ‘I wish it were possible to obtain a single amendment to our constitution . . . taking from the federal government the power of borrowing.’ As president, he tried to keep public debts small and to pay them down swiftly. But he did not try to eliminate the borrowing power. And that was good. Eliminating the borrowing power is too extreme. We all need to borrow from time to time. Even Congress needs to borrow — for example, to buy the Louisiana Purchase while Napoleon has it on sale.
As an economic matter, running an occasional deficit is not the end of the world, nor is maintaining a modest debt, even for a long time. The danger comes when the debt becomes so big that it is no longer manageable. What does it means for a debt to be manageable? It means the debt must be continuously shrinking as a share of one’s income. Both principal and interest must be growing less fast than your ability to repay it. You can pay your debts or increase your income — either way works. But when you do neither, bad things happen.
There are three ways to dispose of a debt: repay, renegotiate, or repudiate. The most likely outcome on our current trajectory is repudiation, via some combination of price inflation and economic deflation (meaning a recession or economic downturn).
A major economic recession with price deflation — which is what happened in the early 1930s — will likely culminate in dollar devaluation, which is what FDR and Congress did in 1934, seizing privately held gold and devaluing the dollar in relation to it. (Free advice: Keep a little stash of gold hidden somewhere.) In that crisis, the economy limped along for another seven years, growing but anemic, with high unemployment. Eventually, aspects of fiscal common sense returned, although government was permanently bigger and federal deficits became routine.
The next crisis will likely be even bigger, because our national debt is much bigger relative to annual output. In that crisis, once the crash-and-devalue cycle has played itself out, we will either go back to fiscal common sense or devolve into Argentina.
So how can we make our national debt manageable? Not by raising taxes. Tax hikes reduce national output, all other things being equal, making things harder rather than easier.
Instead, we must reduce outgo (federal spending), both in real terms and as a share of income (federal receipts). (Restoring honest money would greatly help.) And we must do it on a sustained basis. It must become routine, even second nature.
Before 1917, Congress paid for each new spending bill in the bill itself (pay-as-you-go). Sometimes it cut spending elsewhere to cover the bill’s cost. Sometimes it raised taxes. Sometimes it authorized the Treasury to borrow a specific amount (borrow-as-you-go). And sometimes, it did a combination these things.
Voters dislike tax hikes and spending cuts more than they dislike borrowing. Politicians follow their lead and prefer borrowing as well. All other things being equal, borrowing will tend to be the default option.
And this is especially true when Congress has a magical printing press. And sure enough, just about the time it gave itself a magical printing press, in the form of the Federal Reserve, it started borrowing more heavily.
During the First World War, Congress adopted a convenient alternative to pay-as-you-go and borrow-as-you-go: it established an overall debt ceiling and left the details of any necessary debt issuance to the Treasury Secretary. That way, Congress only needed to vote on raising or lowering the ceiling from time to time.
The scheme worked well enough for a few decades. Debt ceiling votes came to be routine. But they were also a bit politically risky for incumbents. And they became partisan. Usually, they had to be carried by the majority party alone.
By the early twenty-first century, partisan politics had become so polarized that debt-ceiling votes became highly charged. Brinkmanship reigned. Impasse dramas occurred that began to scare voters. Commentators began warning of accidentally stumbling over a ‘debt cliff’ and causing a flight from the dollar and, because of the dollar’s role as the world’s reserve currency, triggering a global economic meltdown.
Scholars began looking for ways to avoid such a fate, and two reform camps emerged. Both agreed the existing debt-ceiling mechanism should be retired, but they differed radically about what to replace it with.
Progressives want to replace the debt ceiling with a standing grant of authority to the Treasury to borrow as much as needed, whenever needed, limited only by whatever Congress has previously authorized. Make borrowing the standard way of paying for everything and just trust Congress to reduce spending voluntarily when necessary to dampen the price inflation that will inevitably follow all that borrowing and associated money printing.
Conservatives and decentralists like yours truly want Congress to go in the exact opposite direction — back to the old pay-as-you-go and borrow-as-you-go system that worked just fine before 1917. Repeal the debt limit and go back to bill-by-bill.
Realistically, Congress will refuse to take either path until the public is fed up with fiscal irresponsibility. And sadly, that will almost certainly not happen until the economy tumbles down the hill.
Now, supposing we get lucky and Congress wakes up and preemptively returns to pay-as-you go before it’s too late, nothing would prevent it from backsliding in the future. And that’s why we need a constitutional amendment.
‘Electing the right people’ won’t work until we have a permanent structural change that alters politicians’ incentives. They must be made to regard chronic, large deficits as political suicide. They must be incentivized to insist on regular, modest surpluses. And that, again, can only be done with a constitutional amendment. I wish it could be done with simple legislation, but alas.
To be clear, I think we also need to freeze peacetime spending, but we should not do that via constitutional amendment.
In the remainder of this discussion, I will try to answer two questions: What should the amendment say? and Who should propose it?
What should the amendment say? Well, to begin with, it should not be a traditional balanced budget amendment. I must have read a few dozen of these, and they are all fatally flawed. Either they lack an enforcement mechanism or they contain loopholes the size of Canada. They would be ignored or evaded — and many of them would invite the courts to impose tax hikes, seriously weakening the separation of powers. No, thanks!
Instead of capping spending, we need to cap debt. We must replace today’s statutory debt ceiling with a constitutional debt ceiling. And it must be enforceable.
More specifically, it must to do all of the following, namely:
- Permit no federal spending beyond current receipts, except for amounts borrowed in strict conformity with the amendment.
- Provide that authorization for any borrowing above the debt cap requires the approval of a majority of the state legislatures in states representing a majority of the citizens of the United States.
- Enforce the debt ceiling with presidential sequesters and impoundments.
- Punish any breach of the ceiling with credible penalties for the federal officials responsible for the breach.
That last feature is critical. Without it, the amendment won’t work. My own preference, in the event of a breach, would be to make all incumbents ineligible for reelection after the end of their current term. This ‘time-out’ from holding federal office could be temporary, say, eight years.
For added incentive, we could make someone personally financially liable for a breach, say, the president or the treasury secretary. We should be creative.
Who should propose the amendment? Not Congress! Congress won’t curb its own powers voluntarily. It will either refuse to propose the necessary amendment or it will make sure the amendment contains fatal loopholes. So that leaves us with the states.
Article V of the Constitution includes a clause allowing two-thirds of the states to convoke a convention of the states for proposing constitutional amendments. (As with congressionally proposed amendments, it takes three quarters of the states to approve a proposed amendment.)
No such convention has occurred since the Constitution was adopted. But the states have held many conventions to proposed amendments. The most famous, of course, was in 1787, the most recent in 1861. (I’ve explained elsewhere why I think fears of such a convention ‘running away’ and ‘totally rewriting the Constitution’ are entirely misplaced.)
The convention-of-states option is there for a reason. The Founders gave us an alternative path precisely to circumvent a recalcitrant Congress in a serious crisis. Surely even a blind man can see that very situation has arisen.
Constitutional Amendments
This plank requires a constitutional amendment placing an automatic, effective, and unavoidable cap on federal borrowing, with safeguards to allow necessary borrowing in a true emergency. Good models to draw on include the National Debt Relief Amendment and the Do Your Job Amendment.
Benefits
Produces balanced federal budgets and an end to chronic federal debt.
Increases the voice of the states in federal fiscal policy.
Revised 27 March 2020
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