A Debt Ceiling Lesson from Europe

American progressives are fond of gazing across the pond at
Europe and wishing the U.S. would emulate it. So as soon as
President Obama started announcing from all reaches of the country
that Congress “must” eliminate the debt ceiling, progressive
cheerleaders echoed his demands, pointing out that most European
countries did not have a debt ceiling.

But Europe worshippers are drawing the wrong lesson
from across the Atlantic. Despite public protests against austerity
cuts, many European countries are instituting constitutional
reforms requiring balanced budgets in the form of “debt brakes”—a
far stronger way to control the national debt than a debt

Conservatives typically argue that the debt ceiling offers a
check on Congressional spending by limiting how much the country
can borrow when tax receipts run out. Progressives, however,
counter that the debt ceiling irresponsibly raises the specter of a
credit default, hurting lender confidence in America.

Reuters blogger Felix Salmon has even argued that the
debt ceiling is a “political distraction at best” that might
trigger an economic crisis at worst. It’s hard to argue with that
given that Republicans ignore the debt ceiling when they have power
but defend it when they do not.

The ceiling has been raised 68 times since 1960-including 18
times under Ronald Reagan, and by nearly $5 trillion under Barack
Obama. Not surprisingly, government spending has gone through the
roof along with the size of the public debt.

What’s the point of having a debt ceiling if every time we
approach it Congress just finds a way to circumvent it?

The debt ceiling didn’t start as a political distraction. Under
the Constitution, any government spending or borrowing has to be
authorized by Congress. For the first 150 years of America’s
existence, that is, most of the republic’s life, Congress
authorized debt for specific purposes such as funding wars or
building the Panama Canal.

In 1939, however, in order to give President Roosevelt
flexibility to conduct World War II, Congress gave up its power to
approve specific debt issuance but set a maximum aggregate
borrowing limit for Treasury. Voila, the debt ceiling was born.

However, what began as wartime “necessity” evolved into
peacetime political cover that no longer required Congress to
justify increasing specific borrowing. It simply authorized
spending and let the Treasury Department sort out the necessary

The results of this bargain speak for themselves. Since 1940
Congress has run a deficit nearly every year (62 of 72 years). The
federal budget has grown from roughly 15 percent of GDP in 1950 to
about 25 percent today. And America has now borrowed over $16.4
trillion-roughly equal to the size of the entire U.S. economy!

America has not been alone in racking up such a large credit
card bill. Greece—the land with debt-to-GDP above 150 percent—leads
the way among her Eurozone peers. And countries like Italy (127
percent), Portugal (120 percent), Ireland (117 percent), and Spain
(77 percent), followed a similar pattern of unfettered debt
accumulation. Even the uber-responsible Germans let their debt rise
to 80 percent of GDP. These debts have crippled the European
economy in recent years. And since they don’t have the
luxury of irresponsibility that America’s reserve currency
gives us, Europe’s leaders have started taking debt seriously.

One method for debt control that has gained popular support is
the Swiss “debt brake.” Adopted into Switzerland’s constitution in
2001, the debt brake requires a balanced budget, but measured over
a multiyear period. In technical terms, it requires the nation’s
“structural deficit” to be nil over the course of a business cycle
so that surpluses generated during boom periods can defray the
deficits during bust periods to keep the overall debt

Implicit in the debt brake idea is the recognition that
constraining debt is important to honorably meet national debt
obligations and avoid default—whose very prospect American liberals
raise to justify their calls for scrapping the debt ceiling.

Germany, for example, has now adopted the
Schuldenbremse (debt brake) concept as well, specifying
that its structural deficit cannot exceed 0.35 percent of GDP in
any given year. This does not cap aggregate debt, but the idea is
that if the federal government is not running huge deficits every
year, the national debt won’t grow.
Of course, the debt-brake idea is not perfect, but it is far more
effective than America’s weak-kneed approach to curbing

Switzerland’s public debt has dropped from 55 percent of GDP to
40 percent from 2003 to 2010. More recently, Germany has quickly
met its Schuldenbremse target of balancing its budget, two years
ahead of schedule. In contrast, America has been running a
structural deficit of roughly 6 percent of GDP annually since