07/27/2011 12:36 pm ET | Updated Sep 26, 2011

Reduce the Debt Limit?

While much of Washington is obsessed with the need to increase the debt limit, many citizens -- and even an elected policymaker -- want to reduce it. This is a clear statement not only of the degree of popular desperation or exasperation about the condition of the country, but also of the degree of misunderstanding or even ignorance about the debt limit itself. There may be some helpful lessons in this surprising notion.

A bill introduced in the Congress, H.R. 2409 (by Representative Paul C. Broun, R-GA), would reduce the statutory debt limit from its current $14.294 trillion to $13.000 trillion, effective October 1, 2011. On the basis of some calls I received on a talk radio program and comments on the Internet, some citizens agree, and probably more would espouse at least gradually reducing the debt limit going into the future.

One can understand the popular concern as people try to get their arms around the potential fallout from our skyrocketing debt. Refusing to increase the limit might seem like tough-love cold-turkey therapy for a credit-card junkie: Stop borrowing, right now -- for your own good. And if that is acceptable, why stop there? Why not actually cut the limit? Then Washington would really have to shape up, and in a hurry.

So let's take that argument at face value. Suppose that H.R. 2409 became law. What would happen?

Well, assuming that the nation managed to limp along to October 1 at the current limit (the Treasury says that it will be out of cash and unable to pay its bills on time in early August, as you know), then at the opening of business on that date, the nation would have to get its hands on $1.294 trillion in cash to pay off debt and drop to the new, reduced limit. It would be as though you had taken out a balloon mortgage on your home, and you let it run all the way to its due date.

For a sense of scale, total tax revenues this year are projected to be $2.230 trillion. So to stay legal, the Treasury would need cash equal to 58 percent of all annual revenues. (The tax revenues already expected wouldn't count, of course; the revenues collected up until October 1 would already be totally gone, and revenues to be collected after that date would be both too late and more-than-spoken-for to cover already-scheduled future outlays.)

How in the world could the Treasury instantaneously (or even over the next 10 weeks) raise cash equal to 58 percent of a full year's revenues? A national bake sale? A national lottery? A world lottery? Needless to say, such a requirement would be totally unmanageable.

And no, we could not do it by cutting spending. Last year, non-interest federal outlays in those two months totaled $496 billion. Just to get to October 1 at the current debt limit, we would need to cut non-interest spending for both August and September by half. But rather than cutting spending by just 50 percent to stay at the current debt limit, saving an additional $1.294 trillion to comply with the debt-limit decrease bill would require cutting spending in August and September by about 311 percent. We have only a couple of weeks to get started, so please send your spending-cut ideas in now.

But suppose we get a little more real. Is it conceivable that the nation could reduce the debt limit in the future gradually, rather than cold turkey? Well, if you think it through, it is conceivable -- but the implications would run directly counter to the principles and past stated intentions of those who now refuse to increase the debt limit.

What does it take actually to reduce the nation's debt? To pay down debt, you need cash left over after you have paid all of your bills. Or in the language of the federal government, you need a budget surplus.

When did the nation last have a budget surplus? At the end of the Clinton administration, from 1998 through 2001. And what did the leaders of the political faction that now wants to hang tough on the debt limit have to say about that? Here is newly elected President George W. Bush, in his initial address to the Congress, on February 27, 2001:

You see, the growing surplus exists because taxes are too high and government is charging more than it needs. The people of America have been overcharged and, on their behalf, I am here asking for a refund.

Prior to that time, others had talked about using that budget surplus to pay down the nation's debt, just as some who now refuse to raise the debt limit propose today. For example, then-President Bill Clinton projected that by 2015 the debt could be paid down to its size relative to the GDP of before World War I. However, clearly, President Bush -- probably like those who now advocate reducing the debt limit -- would not tolerate the budget surpluses necessary to do so.

But the situation is even more complex, because of the technical specifications of the debt limit itself. The debt limit applies not only to the debt that is sold to the public to raise cash for the operation of the federal government, but also to the Treasury special securities held in the government's trust funds. People think instantly of the Social Security and Medicare trust funds, and perhaps with prompting recall the highway trust fund; but in fact, there are more than 100 trust funds internal to the federal government. Even if the government runs a balanced cash budget, and does not need to borrow any additional money from the public, the debt subject to limit will increase because of growth of the balances in the many intragovernmental trust funds.

Let's go back to February of 2001. The statutory debt limit was $5.950 trillion, and the government had stayed below that limit since it was set on August 5, 1997. President Bush intended his budget to continue running an overall budget surplus -- but not enough to offset the growing balances in the trust funds. Therefore, even if the budget and the economy had proceeded fully according to plan -- which they obviously did not -- the nation's debt subject to limit would have continued to rise. According to the February 2001 budget document, the debt limit would have been breached in 2008, and by now, the debt subject to the limit would be $1.179 trillion above the limit, and $1.537 trillion greater than the actual debt subject to limit at the end of fiscal year 2000. President Bush estimated his proposed tax cuts to contribute $1.620 trillion of that $1.537 trillion increase in debt.

In this light, to be logically consistent on principle, anyone who opposes increasing the debt limit today should in 2001 similarly have opposed President Bush's tax cuts. Fortunately, those tax cuts are up for reenactment at the end of 2012, so those who oppose increasing the debt limit today will have the opportunity to make honest persons of themselves, and vote to allow the tax cuts to expire.

Is that likely to happen? Probably not. But before you talk about cutting the debt limit, you had better be careful what you wish for.