An article by economist Jim Hamilton brought a flash of insight into the debt ceiling problem. He pointed out that three separate decisions: the budget, the taxes, and the debt ceiling are an interlocked decision. But the timing in Congress makes it appear like three separate decisions, when it should be only one.

When Congress passes a budget, it commits the Treasury to spend a fixed amount of money on each major department and program of government. The Treasury must issue checks according to that budget.

If Congress fails to raise tax revenues to meet the budget, then the Treasury must borrow the difference to pay the bills that Congress instructed them to pay.

BUT, if Congress fails to allow borrowing, by refusing to raise the debt limit, then the Treasury is being told to do two different and incompatible things by Congress: (a) spend money they don’t have (b) without borrowing. And that is clearly insane.

The solution is to change the timing of the three decisions. Make all three decisions at the same time, as part of the budgeting process. The budget cannot be considered complete until you have also resolved where the money to pay for it will come from.

The House and Senate should modify their budgeting process to include spending, taxing, and borrowing. All three should be in the budget legislation. All three should be voted on together, as a single package.

Here’s the link to Hamilton’s article:

http://economistsview.typepad.com/economistsview/2011/01/debt-ceiling-politics.html