In Robert Redford’s breakout role in “Butch Cassidy and the Sundance Kid” (resulting in both a film festival and a ski resort named after his titular character), Butch and Sundance are cornered by a posse on a cliff with a river below. 

Faced with either fighting their way out or holing up forever, Butch proposes jumping. Sundance, however, confesses that he is afraid to jump because he cannot swim. Butch laughs and exclaims, “Are you crazy? The fall will probably kill ya!” The two take the plunge and their escapades continue.

Much like Butch and Sundance, Congress has, once again, backed itself up against the debt ceiling cliff with few good options.  Secretary Janet Yellen announced that the U.S. Department of the Treasury will have to take “extraordinary measures” (which will launch a protracted political fight) or risk defaulting on the debt by refusing to pay interest payments (akin to jumping off a cliff). Like it or not, Congress must make this difficult bargain to allow the federal government to pay its bills.

However, the debt ceiling is a uniquely American institution — Denmark is the only other country with one — and in its current form actually causes fiscal irresponsibility and political dysfunction.

Throughout America’s history, Congress had few ways to raise revenue to fight wars or build infrastructure. When there was no income tax, the Treasury imposed strong tariffs on imports or taxed the consumption of specific items, such as alcohol. Thus, in times of national emergency, Congress would issue debt for a specific amount or project. This policy meant there were various types of government issued bonds and securities for expenses such as the Civil War, the Panama Canal and the transcontinental railroad. Marketing and maintaining all of these different asset classes proved to be complex and costly.

 In World War I, to defeat the Kaiser and support the efforts of the doughboys sent “over there,” Congress authorized the first, consolidated, general government treasury bond. This action gave the Wilson administration the flexibility needed to finance the war efforts and maintain the government at home. However, as a compromise, Congress limited the amount of debt issued and, in a strange twist of financial fate, separated the debt limit authorization from the normal budget process.

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The U.S. Constitution gives the House of Representatives the “power of the purse” in the Appropriations Clause so it would separate the power to set budgets from the executive branch and ensure that the elected officials closest to the “People” would primarily spend the public money. The “Full Faith and Credit” clause of the Constitution prioritizes interest rate payments over all other spending such as defense or entitlements.

These combined constitutional obligations made the United States treasury bond the quintessential risk-free asset. Since other investment types — such as corporate bonds from the private sector, municipal bonds from city governments or even foreign debt (for example, Greek bonds during the Euro Zone crisis) — posed a risk of default or skipped interest payments, the U.S. government assured investors that it would also be good to its word. This premier position on the global market means our government can borrow at lower rates and can easily find investors who wish to use Treasury bills to diversify their portfolios.

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Every type of risk is now measured against the probability of Congress paying interest on the debt. If it was to become more risky, then all of us would pay a premium on everything from homes to cars to student loans, because of politicians playing chicken with public finances. Separation of the debt limit decision from the regular budget process causes severely misaligned incentives. Members of Congress can tuck their favorite spending gimmes or tax cuts into the budget and then months or years later, when the bill comes, use it for political leverage. They can appear “fiscally conservative” and scream about debt, never mind that their fiscal binge has come and gone. 

The debt ceiling is not, as commonly supposed, akin to cutting up a shopping addict’s credit cards, but rather it’s refusing to pay the tab on a three-course meal already consumed. To refuse to lift the debt ceiling and claim to be a good manager of the people’s resources is disingenuous at best, and incompetent governance at worse.

The national debt is a huge concern especially as interest rates rise, Social Security and military pensions mature, and Medicare continues to balloon. Congress should link the debt debate to the normal budget process and do the job that the American people impaneled them to do: conduct the nation’s business in a responsible manner.

Michael S. Kofoed, @mikekofoed on Twitter, is an associate professor of economics at the U.S. Military Academy and a research fellow at the Institute of Labor Economics. A Utah native, he holds degrees in economics from Weber State University and the University of Georgia. These opinions are those of the author and do not represent the U.S. Military Academy, the Department of the Army or the Department of Defense. 

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