A free-market approach to the debt ceiling

My wife’s Uncle Ken – a fiscal conservative – sent me an interesting e-mail yesterday that made a fascinating point:

“The GOP is the champion of letting the market decide economic matters.  Given that, shouldn’t the market decide how much debt the US Govt should carry?  If the GOP was true to its stated values it would be pushing for the elimination of the debt ceiling altogether.  The market can decide how much risk it wants to take with the US Govt paper instead of having some artificial limit.”

That’s exactly right. The invisible hand of the market is the Republican’s answer to everything. Why not let it decide what the debt limit ought to be? And, for all the talk about a debt crisis, the market shows no sign that we’re anywhere near such a limit. Unless Republicans manage to completely screw things up and refuse to increase the debt ceiling, risking default, investor confidence in the United States is extremely high. There are no shortage of investors willing to lend to us at historically attractive interest rates. Again, unless Republicans mess it up, our credit rating is golden.

Instead of threatening to refuse to increase the debt limit, Ken is right – Republicans ought to be trying to eliminate the ceiling altogether. But then, the overriding principle for today’s Republicans is not actually fiscal conservatism or the free market: The overriding principle is starving government. Investors help feed the government, so their judgment is not to be trusted and the free market, in this instance, must be contained.

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