As the president prepares his State of the Union speech, he must worry that another regular Washington event will overshadow it: the vote to increase the national debt ceiling. But instead of concentrating on this figure, the president and congressional leaders should focus on the economy. That way, global markets - the real regulators of the debt ceiling -- will be less likely to decide that we can't borrow any more, even if the pols say it's OK to do so. Today's debt limit is nearly $14.3 trillion; we've already borrowed $13.8 trillion. Since, as usual, the government is running a deficit?, not a surplus, the House and Senate must vote to allow Obama's Treasury Department to borrow more. Some Republicans plan a "showdown" instead, as Sen. Jim DeMint, R-S.C., put it. "We are not going to increase our debt ceiling anymore. We are going to cut ... to stay within the current levels," he said.
Such brinksmanship wouldn't be unprecedented, a fact that Obama could point out in his speech. In November 1985, when the ceiling was $1.8 trillion, President Reagan wrote in his diary that "if we don't have an extension of the debt ceiling by the 15th, we will have to sell gold or default on bonds."
Reagan lamented that Congress was "playing games," and "that goes for Repubs. as well as Dems." Two years later, Reagan, chafing under a $2.3 trillion ceiling, wrote about his latest increase request that "Congress has a way of loading this bill with amendments knowing how impossible it is to veto it."
More recently, Obama played the game from the other side of Pennsylvania Avenue. As senators, both Obama and Vice President Joe Biden voted against President Bush's request to hike the ceiling from $8.2 trillion in 2006, the e21 economic-policy think tank notes. Back then, Obama called debt a "hidden domestic enemy."
Rather than rerun this decades-old theatrical production, Congress should address the culprits behind the debt: government policies that distort the economy--even when it seems to be doing well--and ultimately crash it.
Congress should focus on spending, particularly "tax expenditures," or tax breaks that cost $1 trillion annually. Legislators could phase out the mortgage-interest tax deduction, for instance, so as to stop encouraging Americans from increasing their own borrowing to buy houses. That way, capital would be freer to go to more productive parts of the economy, rather than to housing and the consumer spending that rising house prices so long enabled.
Congress can focus, too, on making sure that we use debt wisely. House Republicans should make sure that Washington - along with state and local governments -- invest in infrastructure, so that private companies have a modern public-works backbone to support them as they grow.
By taking these actions, Congress can help convince global investors that they can remain confident in American debt.
But markets can't offer this vital feedback unless the politicians allow them to. Congressional leaders also should take this opportunity to remind the public that the Dodd-Frank financial-reform law that Obama signed in July has not made the financial sector subject to market discipline, but rather enshrined "too big to fail."
Washington's permanent embrace of large financial institutions warps global markets, including government-bond markets. Our too-big-to-fail banks can't help signal in time if the government has borrowed too much, because the banks themselves are permanently dependent on government guarantees.
As government-underwritten banks continue to lend too much, they help Americans buy imported consumer goods--in turn enabling China to buy yet more Treasury bonds. Moreover, as long as banks remain too big to fail, they remain a hidden government liability - meaning trillions more in expenditure, eventually, for future bailouts and stimulus.
So let Congress raise the debt ceiling again as the price of past follies--then, concentrate on the hard stuff.
Nicole Gelinas is a contributing editor to the Manhattan Institute's City Journal and an adviser to e21.