Treasury debt ceiling - the big issue for the first quarter

Why should we have a debt ceiling if every time we come close to it, the cap is raised?

Appearing on ABC’s This Week, Austan Goolsbee spent the hour noting the implications of a failure to pass a raising of the debt ceiling.

“Well, look, it pains me that we would even be talking about this,” Mr. Goolsbee told co-host Jake Tapper. “This is not a game. You know, the debt ceiling is not something to toy with.”

Mr. Goolsbee explained that any chance of failure to pass an increase would amount to a default. “If we hit the debt ceiling, that’s essentially defaulting on our obligations, which is totally unprecedented in American history, ” the chairman said.

The idea that it would pain someone from the government to talk about hitting the debt ceiling is an interesting choice of words. Is the pain coming from too much deficit spending or the fact that we have a debt ceiling? (It has been making the political rounds that Senator Obama voted against raising the ceiling in 2006.

The debt ceiling issue can become one of the key sovereign debt concern for the US. It is supposed o provide some constraint on debt spending because Congress is unwilling to constrain itself. But like many self-imposed constraints it is not binding. "I promise not to eat cake as a new year's resolution until someone gives me a piece of cake."

If government resources are considered common property, special interests can finance expenditures on preferred items. The overall debt will be higher will net transfer payments which will ultimately ed to higher taxes. A debt ceiling an be used to break this fragmented fiscal policy. (Described by A Valasco of NYU and the NBER.)

Special interests, of course, will argue that you cannot play chicken with a binding constraint. The special interests may also include all taxpayers. The issue is whether this is a special situation given the recession. The large deficits were, in part, counter-cyclical policies to minimize the cost of the down-turn. Under this case, a rise in the ceiling may be warranted; however, the recovery has been going on since June 2009 so how much longer should we expect debt increases? If the ceiling is raised then the issue is just pushed forward to another date.

How long should this go on?