Top Obama economist says we should abolish the debt limit as the current political 'brinksmanship' hurts the economy

In a speech at the Independent Community Bankers of America 2023 Capital Summit Tuesday, Treasury Secretary Janet Yellen said that failing to raise the debt ceiling would lead to “widespread suffering” for average Americans, a crashing stock market, and outright “economic and financial catastrophe.”

The federal government hit its $31.4 trillion debt limit in January, and Yellen has been forced to use “extraordinary measures” to continue running the government since then. But the Treasury Secretary reaffirmed Tuesday that the X-date, when the U.S. will no longer be able to pay its bills even with the extraordinary measures, could come as soon as June 1. 

Now, even Wall Street is starting to get nervous. The price to insure against a failure of U.S. government debt, as measured by the spread of one year U.S. credit default swaps, hit a record high last week.

And Jason Furman, who served as chairman of the council under President Obama, noted that even if Congress does manage to raise the debt limit in time (which would be the 79th time it has done so since 1917), the negative effects of the political gridlock in Washington will still be felt.

“Even just the brinkmanship itself has a cost. It’s completely unnecessary,” Furman, now a Harvard Kennedy School professor, told CNBC Tuesday. 

Treasury Secretary Yellen explained in a letter to Congress Monday that waiting until the last minute to raise the debt ceiling can hurt consumer confidence, raise short-term borrowing costs for taxpayers, or even lower the credit rating of the U.S. government. 

And Furman has said for years that the debt limit should be abolished entirely, claiming in a 2017 Wall Street Journal op-ed that it is no longer helpful in restraining the national debt as it was intended.

“Whatever residual value the debt limit may have is far outweighed by the risk that a potential U.S. default poses to the global economic order,” he wrote.

On Tuesday, he reiterated that view, telling CNBC that using the debt ceiling as a way to moderate federal spending isn’t very logical and he “would love to have seen the debt limit abolished” before this latest political gridlock.

“I think it’s a really costly way to bring that about. The brinkmanship always costs us and there are other mechanisms [to get around the debt ceiling],” he said. 

Some experts have argued Congress could mint a trillion dollar coin to avoid the debt ceiling, while others say it could be abolished based on an interpretation of the 14^th Amendment, which was passed by the Senate in 1866 and undermines the concept of a debt ceiling entirely, according to some experts. That amendment reads: “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”

Glenn Hubbard, former Council of Economic Advisers chairman under president George W. Bush and Columbia Business School professor, also argued Congress should find a better solution than the current debt limit Tuesday. 

“Really what we need is a pivot to a budget framework that, if followed, we would just have clean debt ceiling increases. This periodic theater, as Jason suggests, is just not very productive,” he told CNBC.