Do We Need the Debt Ceiling?

Some experts say it’s unnecessary and has morphed into a political tool.

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"I'm not opposed to the idea of having a debt ceiling," says Adolfo Laurenti, deputy chief economist at Chicago-based financial services firm Mesirow Financial. "In general, one problem that most countries have around the world is that the spending power of the government is, for the most part, unchecked and that really allows some governments to spend exorbitant amounts of money and get themselves in trouble."

While the United States might benefit from having some benchmark for debt issuance, the current incarnation of the debt ceiling rule is less than ideal. "The debt ceiling is not a very smart rule because it's in nominal terms," Laurenti says. "Because the size of the economy keeps growing so spending is growing, we've had to go through this painful exercise of raising the debt ceiling with a certain frequency."

A system based on debt as a percent of GDP would be better, Laurenti says, and should include the flexibility to issue more debt during recessions or other financial emergencies. "Ideally you would want to have something on a constitutional level," he says, emphasizing the need for a long-term rather than short-term solution for the debt problem. "When you make the rules out of a normal Congressional procedure, then in two years you might have a new majority that will change everything."

[See European Debt Crisis: Could Italy Be Next?]

Eventually, Congress must raise the debt ceiling—not doing so would be economic suicide, experts say, with far-reaching impacts not only at home but abroad as well. Until August 2, the Treasury can continue "shuffling paper" to meet the country's financial obligations, but past that date, the details start to become foggy. The Treasury will have to prioritize payments, which could mean suspending Social Security payments or even delaying interest payments to bondholders, an event that would likely send global markets reeling.

That's the worst-case scenario. Most experts say an agreement will be made ahead of the August deadline, but the bottom line is that squabbling over the debt ceiling is distracting Congress from dealing with the fundamental issues at the core of the country's debt problem. Until those are resolved, structural problems with spending, revenue, and debt will continue cropping up and over time could degrade America's reputation among investors as a fiscally responsible country.

"At the end of the day, what matters is our fiscal house and how we are managing it," Aggarwal says. "We've had such drama going on and the negative side is it creates so much uncertainty in the marketplace, and the financial markets hate uncertainty. The underlying issues have to be addressed. We really need to think about getting our deficit down."

Twitter: @mmhandley

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