Why we must freeze the debt limit
By: Jagadeesh Gokhale
April 19, 2011 04:37 AM EDT









How valid are these concerns? Not very.


In contrast, the current prospect of a technical default, from failing to increase the debt limit, would not be due to any real national insolvency. Given today’s low interest rates, the federal government could easily raise the resources needed to meet today’s contractual government obligations.

The correct description for the technical default from Congress’ failure to increase the debt limit, therefore, should be “a temporary suspension of fiscal operations to promote a more prudent fiscal course.”

A failure to increase the debt limit now would just create an ersatz “crisis.” For too long, analysts and politicians have balked at the massive political impediments to reforming the federal budget — especially entitlement programs.

Many now concede, actually, that no prudential reforms are likely unless there is an imminent “crisis.” On the other hand, political liberals argue that there is no real “crisis” — and so no need for real reforms.

Well, here’s the opportunity for a “crisis” that “should not be wasted.” It would be a real crisis for those urging caution — given what they believe. And it would be an ersatz crisis for others — who believe in the salutary effects of crises on fiscal policies.

Given its purpose is to avoid a real future crisis, by bringing to heel run-away spending on entitlements and other wasteful government programs, here’s an opportunity for experiment: Would a debt-limit “crisis” beget better fiscal policies?

How might investors really view this ersatz U.S. debt crisis? If some lawmakers’ refusal to vote for increasing the debt limit without also passing prudential fiscal policies resulted in a technical U.S. default, it would demonstrate their significant political strength.

Might that not actually induce investors to buy long-term U.S. debt — reducing long-term interest rates and improving the U.S. investment climate?

Indeed, investors should be fearful of the opposite: an increase in the debt limit without a serious challenge from reform-minded lawmakers. This only signals business as usual for U.S. fiscal affairs.
