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MALPASS: Debt limit opportunities

Use the $14 trillion debt to force change

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This spring's debate on increasing the debt limit probably will be the most important opportunity in this Congress for fiscal conservatives to have an impact - to force an upheaval in Washington's tax-and-spend culture that will slow out-of-control spending.

The debt-limit issue is not whether you want more national debt - no one wants that debt clock in Times Square, now over $14 trillion, to keep rolling higher. The problem is that Congress used the nation's credit card wildly for years and already has spent more money than the debt limit. It's time to pay the bill and finally take away the credit card - use the debt-limit increase to force a fundamental reduction in Congress' spending authority.

Why not simply oppose an increase in the statutory debt limit? It won't work because of the odd way the national debt is counted. Even if the budget were totally balanced tomorrow, with zero fiscal deficit achieved through a trillion-dollar spending cut, the type of debt covered by the debt limit will go up automatically - to more than $16 trillion by 2014 - because it includes the paper IOUs held by the Social Security trust fund. Social Security takes in more cash than it pays out. Washington spends these tax receipts as fast as they arrive and gives the trust fund mere IOUs, but the debt ceiling, based in the Constitution, counts these IOUs. The better the cash flow into Social Security, the higher the statutory debt ceiling has to go.

Rather than fighting against a debt-ceiling increase that absolutely must take place because of the odd way it is defined in law or adding killer provisions, Republicans should unite to attach effective new rules that restrain spending and the size of government. Two viable concepts that the Democrats would have a hard time opposing: limits on the marketable national debt relative to gross domestic product (GDP) and on federal spending relative to GDP. To force debt and spending cuts, there should be escalating penalties and enforcement rules whenever these limits are exceeded. These new rules would create a check-and-balance system that is missing in the current debt ceiling and would add to the effectiveness of recent House promises to shorten legislation and match all spending increases with spending cuts.

Republicans should embrace the debt-ceiling opportunity with gusto. This is what fiscal conservatives live for - a public fight over excessive spending leading to revolutionary legislation that Senate Democrats can't filibuster and the president will have to sign. To succeed, the new House Republican majority will have to communicate early and clearly that they are unified, responsible leaders adamant about stopping America's spiral into the fiscal abyss and, at the same time, paying past debts. This would make responsible fiscal leadership a signature Republican achievement right at the beginning of the new Congress.

To be an effective, competitive capitalist nation, the United States has to lower federal spending, now more than 24 percent greater than GDP, and reverse the growth in the national debt ratio. It stands at 60 percent - the $9 trillion in marketable debt divided by the $15 trillion GDP - and is forecast to exceed 100 percent of GDP in the Obama administration's budget, a level well above sustainability. Though already mind-bogglingly large and growing fast, the $9 trillion in marketable debt doesn't include any of the unfunded spending promises - Social Security, Medicare, the constantly growing losses of Fannie Mae and Freddie Mac and the new entitlements the administration has added.

Debt and spending caps would create a ready-made enforcement system: Whenever the caps are exceeded, take benefits away from congressmen, senators, the president, the Cabinet and the senior executives in government service. It's their job to make the decisions needed to reduce government. If they don't, they should give up raises, free parking spots, extra staff, free day care, juicy committee assignments, travel and an escalating array of power until the debt growth stops. If the fiscal crisis persists, they should face cuts in their pay and benefits and prohibitions on naming public works after themselves. The administration should be required to make quarterly proposals to Congress on spending cuts and should be given impoundment authority, an ability all presidents before Richard Nixon used to reduce spending.

The most growth-oriented outcome would be an eventual peacetime debt cap at, say, 55 percent of GDP based on spending cuts. Congress and the president could waive the cap during a national emergency, perhaps with the agreement of a two-thirds majority of each chamber - World War II pushed debt to 100 percent of GDP for a short period. But otherwise, a marketable debt-to-GDP ratio might last decades or centuries, providing a meaningful new check and balance on government overreach.

The upside is huge. If the United States shows that it has a mechanism to control federal spending and debt, it will create private-sector optimism, releasing the pent-up cash for job creation. Financial markets will help by strengthening the dollar and bringing capital and jobs back to America after years of investing abroad.

Fiscal conservatives may get only one shot at communicating a responsible ramrod limit on the size of government before gridlock settles in. The problem is that the statutory debt limit doesn't provide leverage over Washington's culture. It grows with inflation and population and includes fictitious Social Security reserves.

Yet Republicans are fragmented, with many opposing the debt-limit increase even if it means a catastrophic default. Democrats call them irresponsible for complaining about spending and debt or for adding poison pills to the very serious task of avoiding default. That rhetoric will intensify if the current debt ceiling runs out with Republicans on the fence, giving Washington's culture more oxygen to fight spending restraint tooth and nail. The depth of the fiscal crisis was apparent in the December lame-duck, big-government blowout - billion-dollar tax subsidies for single industries, vast new federal programs and even entitlements, but no cuts anywhere.

The earlier Republicans take a unified proposal to the public, the more chance it has of becoming law. The opportunity is to convert the debt-ceiling issue into structural spending reform. That's what the country wants. Republicans should agree on a fundamental change in the spending process that would bring a lasting upheaval to Washington, attach the debt-limit increase to it, explain their leadership to the public, pass it overwhelmingly in the House and then send the bill to the Senate early enough to get the public mobilized.

David Malpass, president of Encima Global, was deputy assistant Treasury secretary in the Reagan administration.

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