Debt-Limit Fight Seem Played Out? It Is

If the back-and-forth arguments over the upcoming debt-ceiling fight seem played out, that’s because they are—and they were, even 50 years ago.

The government is expected to hit its debt limit sometime in the second half of February, after which point it will not be able to meet all of its spending obligations. House Speaker John Boehner has said that his party will only agree to green-light further borrowing if Democrats agree to an equal amount in spending cuts. But holding up a debt-ceiling increase over spending is a bad idea, the Obama administration says, echoing a similar argument made by President Kennedy’s Treasury secretary 50 years ago, as The Economist’s Greg Ip pointed out in a Tuesday morning tweet.

In 1963, Treasury Secretary Douglas Dillon delivered a speech at a University of Connecticut awards luncheon—reproduced in the pages of the New York Federal Reserve's monthly review—that argued that no fiscal-policy issue was "in need of more light and less heat as the debt limit." And his arguments are strikingly familiar.

"[L]et no one labor under the delusion that the debt ceiling is either a sane or an effective instrument for the control of federal expenditures," he said.

Hitting the ceiling would force the government to delay paying its bills, Dillon argued. It's an idea central to one modern plan to avert a debt default, but it comes with economic consequences, he said.

"That is exactly what happened in 1957, when an unrealistic debt ceiling forced the executive to defer payment on its bills. No expenditures were cut back; they were simply postponed and government contractors had to wait for their money," he said. "The unhappy economic effect of that unrealistic 1957 debt ceiling—in combination with other restrictive fiscal measures—needs no retelling here. But anyone who recalls the lesson of 1957—the year from which we date the pattern of slow economic growth which the president's tax program is designed to alter—is not likely to forget it," he said.

Holding up the debt ceiling "in the name of fiscal responsibility" would only wreak havoc, Dillon argued. "[A]n unduly restrictive ceiling could place this country in an untenable fiscal situation."

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