05/19/2011 01:30 pm ET | Updated Jul 19, 2011

On the Debt Ceiling

A few commenters have asked me to weigh in on the debt ceiling debate.

I haven't written much about it, mostly because a) it's been well covered elsewhere and b) I can't think of good synonyms for "catastrophic" (actually, Word's list is excellent: I like "ruinous").

Sorry -- gallows humor. I don't know about you, but I go from thinking this is really scary to telling myself, "no, they couldn't really let this happen" ("they" being Congress, and "this" being not raise the ceiling).

As I noted in a post the other day:

I understand that some of those playing this game of globally high-stakes chicken are not anxious to support a higher debt ceiling. I mean, some of these folks were recently sent to Washington to cut spending and explaining to their constituents why they voted to add a cool trillion of borrowing headroom won't be a cakewalk.

But to drag this out unquestionably hurts our economy and our country far more than any political advantage members might gain from holding out. It's time for elected officials to put the country first.

But let me say a few words about why this is so important.

Obviously, we need to pay for current services, including debt services. Here's Secretary Geithner's list of what would be at risk in this regard:

"Payments on a broad range of benefits and other U.S. obligations would be discontinued, limited, or adversely affected, including:

  • U.S. military salaries and retirement benefits;
  • Social Security and Medicare benefits;
  • veterans' benefits;
  • federal civil service salaries and retirement benefits;
  • individual and corporate tax refunds;
  • unemployment benefits to states;
  • defense vendor payments;
  • interest and principal payments on Treasury bonds and other securities;
  • student loan payments;
  • Medicaid payments to states; and
  • payments necessary to keep government facilities open."

Here's a related point I don't hear made enough: Congress already agreed and is committed to the current level of spending. For them to renege on this commitment because it means more borrowing, which of course they knew it would, is crazy. No government or economy in the world could operate that way, and to my knowledge, none does (i.e., I can't find any other countries with debt ceilings, but correct me if I'm wrong about this).

Then, there's the economy, and what even the threat of default would mean to financial markets and the real economy (the latter being jobs, incomes, stuff like that which kinda matters to people). Alan Blinder gives the gory details this AM is the WSJ. His point about the fiscal contraction this would engender -- the amount of money this would pull out of the economy -- at a time of already very high unemployment is very important.

(Note: Some point out that a sovereign nation whose debt is in its own currency cannot default because we can print money. But that would be a terrible solution with essentially the same consequences.)

All of the above is well known and understood, if not heeded, by many in this debate.

But here's one thing that I think is missing: a rationale for borrowing at all. There's deep and serious misunderstanding of this point. Too many people think deficits and debt are bad and they are not. They are an important and necessary part of our economic life. And yes, like anything else in life, you can overdo it.

We would all, households, business, and government sector, be less productive and less well-off if we couldn't borrow to invest in our future. Think about borrowing for college or starting a business. Our fluid credit markets are one of the things that make our economy strong (recall what happened when they froze a few short years ago).

If any of these sectors, including the public sector, failed to borrow due to irrational fear of deficits when the return on our investments is potentially positive, we'd be a lot worse off.

And, of course, when the private sector stumbles, the government must temporarily run deficits to offset the shortfall in private sector demand. To fail to do so is to consign millions to unnecessary joblessness and to sacrifice -- forever -- potential growth and income.

Now, none of this should be taken to imply that borrowing is always good. To add to the debt to pay for inefficient consumption of health care, for example, is an unsustainable problem we must solve.

It's also the case that our debt should not be "structural," meaning we should balance revenues and spending so that in good times we pay down the debt... it doesn't have to disappear, but you definitely want it shrinking as a share of the economy in economic expansions. This is also essential to a healthy economy, and once they raise the debt ceiling, policy makers need to turn to this right away. (Of course, they're allegedly trying to do both at once...I get the politics of this but it's dangerously lousy economics.)

So, while it's surely not fashionable to speak out in favor of borrowing, the fact is it's a perfectly natural and important part of economic life. I'm sorry, Will...Polonious was wrong.

This post originally appeared at Jared Bernstein's On The Economy blog.