Republican Brinkmanship Over Debt Ceiling Risks US Economy, Ignores Core Problems
Reform should be addressed through the budget process, not the payment process
Last month, the federal government once again hit its statutory debt limit. In order to continue paying its bills, Treasury Secretary Janet Yellen announced that she would begin implementing so-called “extraordinary measures.” These measures are no longer particularly extraordinary: Since the mid-1980s, Treasury has implemented them regularly.
The measures basically involve removing Treasury securities from, among other places, federal employee retirement funds, or not depositing them there to begin with. These treasuries will be replaced when the crisis is averted, but in the meantime, they do not count toward the debt limit, and new debt can be issued in their stead. Treasury expects to be able to pay the bills this way until sometime in June.
All this may sound like a bit of a gimmick, but the whole debt ceiling situation is gimmicky. The simple reason why the federal government hit its statutory debt limit, and why it continues to need to borrow, is this: Congress has told the executive to spend a certain amount of money (A); Congress has authorized the executive to collect a certain amount in tax and other revenue (B); and A is greater than B.
This is an entirely different situation from the one populists on the right like to analogize it to: the irresponsible child who abused a credit card, per Speaker Kevin McCarthy. Even in that scenario, refusing to pay the credit card bill is not a particularly prudent course of action, but such is the state of American politics. In a better world, Congress would replace the debt limit with institutional reforms to facilitate budgetary remedies to our long-term fiscal challenges.
The Debt Limit: Resistance Is Futile
Why have a debt limit in the first place if expenditures and revenues are separately authorized? Ironically, the original purpose of the debt limit was to facilitate, not complicate, the work of the Treasury department. Until World War I, Congress authorized each individual debt issuance, providing the Treasury with detailed instructions regarding the terms of each loan. The modern debt limit came into existence between 1917 and 1941, as Congress gradually weakened and then abolished the restrictions it imposed on the composition and parameters of the national debt other than its aggregate size. Put simply, rather than issue debt piecemeal, Congress put a cap on the overall debt and let the Treasury Secretary take it from there.
The debt ceiling hasn’t actually limited the size of the debt in any meaningful sense, of course. The 1941 limit was $65 billion. The current debt held by the public is around $24,584 billion. The limit’s inefficacy was clear at least half a century ago: A 1959 Washington Post headline declared, “Brookings Study Finds Legal Debt Limit Is Futile.”
What does the debt limit do, then? As a tool of brinkmanship, it creates a heretofore small but real risk of the United States’ defaulting on its sovereign debt and, more broadly, not meeting its budgetary obligations. This risk has increased now, since Republicans in the House of Representatives have pledged not to raise the debt limit unless President Joe Biden and Democrats in Congress do not agree to as-yet-unspecified demands.
The specter of a federal default is an ugly one. Default raises interest rates on the federal debt, thereby worsening the country’s fiscal position. Default also raises the cost of capital throughout the economy by raising the effective floor for all interest rates, including those paid by households. To put it differently, default undercuts confidence in the world’s quintessential “safe asset”—the U.S. dollar—by undermining its key role as collateral in all sorts of transactions. As the former central banker Paul Tucker has pointed out, because default poses a risk to the dollar’s position as the world’s reserve currency, it weakens a geopolitical strength of the United States in its rivalry with China. Losing this dominant position would have both modest direct economic costs and, more significantly, negative consequences for the United States’ ability to collect information from and to exclude opponents from international financial networks.
Default also diminishes households’ confidence that the federal government will deliver on its promises to them, perhaps forcing them to take precautionary measures like reducing their spending. As the nation approaches the “X date”—the day when the federal government can no longer meet all its obligations in full and on time—these risks increase, causing turbulence in financial markets even if there is no default. Were default to happen, this turbulence would likely be severe enough to trigger a “clean” debt limit increase, with no strings attached, within a matter of hours or days, similar to what happened with the initial failed passage of Troubled Asset Relief Program in September 2008.
Not that the national conservatives playing chicken with the debt limit necessarily care about any of this. They are more than happy to embrace objectively pro-Chinese Communist Party policies when those policies suit their grievances. We see this in areas like immigration policy, where they oppose welcoming even highly skilled migrants escaping from Hong Kong or workers with STEM PhDs who could bolster U.S. competitiveness in the global economy. More broadly, it is galling that a crowd that loves to talk about American greatness plays games with one of the nation’s basic obligations—to make good on its promises—at the risk of destabilizing the U.S. and global economies.
See No Evil, Hear No Evil, Speak No Evil?
Over the years, three not-very-good options have been put forth to deal with the debt limit. One is that the Treasury could mint a high-value platinum coin and deposit it with the Federal Reserve. The Treasury Secretary is authorized “to mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time,” and this coinage is not subject to the debt limit. But besides the cartoonish image of an extremely valuable—and perhaps mammoth—coin moldering in a vault, there’s no guarantee the Fed would accept its deposit. Moreover, any legal challenges could create precisely the turbulence and default risk that the plan is meant to avoid. Supporters have done themselves no favors by suggesting that these concerns can be easily addressed if the president would just “ignore SCOTUS” and “[s]end troops to the Fed.” (It may not come as a surprise that there is significant overlap between “Mint the Coin” types and fans of Modern Monetary Theory, another movement that has generally refused to acknowledge or deal with the unintended but predictable results of implementation of its ideas.)
A second proposal for managing the debt ceiling is that the Fed could buy up or accept as collateral Treasury securities that go into default or are otherwise trading at a discount. That might help market functioning by propping up the value of Treasury securities, but by its nature, this approach comes too late to avoid default and wild price fluctuations. Even in the very best scenario, it risks dragging out the political fight by reducing the damage that default causes in one specific area.
A final proposal is that the government prioritize payments to bondholders over other expenditures. This is administratively complicated, since government payment systems are not built to selectively process payments, and even if it were feasible, it would still mean that the government defaults on its obligations, if not its debt. This would be default by another name, as Brian Riedl of the Manhattan Institute puts it. In a similar spirit, Treasury Secretary Janet Yellen has described it as “effectively a default.”
These three approaches may be preferable to outright default, but they create a range of new administrative, legal and political problems that don’t really fix the underlying issues. None of them will accomplish what policymakers should be trying to do: ensure that the United States lives up to its financial obligations and retains its standing in global markets. Concerns over the national debt should be addressed by Congress in the budget process, not the payment process.
Reforming an X-Dated Budget Process
During Democratic presidencies, Republicans argue vociferously that federal spending levels are too high. This may be true, but these same Republicans move to protect large categories of spending rather than propose specific cuts.
A lot of federal spending is quite popular, even among Republican voters and elected officials, and it gets taken off the table straight away. This includes Medicare, Social Security and defense spending: half of all spending. Interest payments come off the table too, making another 10% nonnegotiable. With 60% of federal spending deemed untouchable by those demanding spending cuts, the specificity in proposed policy changes ends.
Now, perhaps the eventual settlement around the debt limit will include some largely symbolic spending cuts or freezes to help Republicans save face and make President Biden look fiscally responsible. But that does little to address the very real long-term fiscal problems on the horizon. The Congressional Budget Office projects that deficits will grow from 5% of GDP in 2022 to 11% in 2052. In their estimation, the debt would double as a percentage of the gross domestic product, from just under 100% of GDP to almost 200% of GDP.
In some ways, the CBO projections are overly optimistic. They assume that Congress will let some of the tax cuts from the 2017 Tax Cuts and Jobs Act expire and that the only types of spending that will increase are Social Security, Medicare and other health programs, as well as interest on the debt. The latter point is particularly important: The rapid deterioration in the U.S. fiscal position forecast by the CBO is driven by precisely those categories of spending even Republicans want to shield from cuts. If spending increases in other areas or revenue is reduced, the debt-to-GDP ratio could climb even higher.
Rather than focus on what can be cut between now and the X date, policymakers serious about restoring fiscal responsibility should nudge the budget process in a more productive direction.
The last time Congress significantly reformed the budget process was in the 1970s. It created a process to determine spending in which the congressional budget committees would produce a budget resolution that establishes a big-picture framework for the budget, authorizing committees would create agencies and programs, and appropriations committees would allocate funds to these agencies and programs. This process has since broken down and has largely been replaced by continuing resolutions—stopgap measures that keep spending going without adjusting to changed circumstances—interspersed with leadership-driven spending bills.
In addition, many spending categories—so-called mandatory spending, which includes large budget items like Social Security and Medicare—run on autopilot and do not change unless Congress actively chooses to change them. This is how the revenue side, managed by the House Ways and Means Committee and the Senate Finance Committee, is supposed to work as well. But there we have seen a shift toward expiring provisions, as narrow Senate majorities have relied on parliamentary shortcuts to pass their preferred changes to the tax code. The primary shortcut is called the reconciliation process, and, basically, it circumvents Senate rules so that bills pass with simple majorities rather than the 60 votes required to beat a filibuster. Legislation approved through the reconciliation process cannot add to the forecasted deficit beyond the window of the next 10 years, which leads policymakers to pretend that tax cuts and spending increases will expire near the end of that window so they do not need to find ways to offset them. Of course, when Year 8 or 9 actually arrives, these provisions can then be extended anyway, driving up future deficits. This famously happened with most of the George W. Bush tax cuts, and it may well happen with the many 2017 tax cuts set to expire in 2025.
To sum up, large and growing parts of the spending side of the budget are untouchable; the rest of the spending side of the budget is determined in an ad hoc process driven by congressional leadership; and significant chunks of the tax system are about to expire. The costly brinkmanship around the debt limit does nothing to address these recurring problems.
Optimistically, there is room for improvement on the status quo. Policymakers could eliminate and replace the debt limit with a bipartisan commission that meets every five or 10 years and proposes long-term budget reforms. We had something a little like this during Barack Obama’s administration: the National Commission on Fiscal Responsibility and Reform, better known as Simpson-Bowles, after its co-chairs, former Sen. Alan Simpson and former White House chief of staff Erskine Bowles.
Simpson-Bowles was a creation of the executive, but Congress should create such a commission to take back its constitutional and ethical responsibilities to right the fiscal ship. Whatever reforms the commission proposes could then receive privileged treatment in Congress: no filibuster in the Senate and a guaranteed vote in the House. As much of the current tax system expires in 2025, that could be a good target year for the commission’s first batch of proposals.
It would be a bit like the reconciliation process, which is not subject to the Senate filibuster, but without excluding Social Security or nonbudgetary components like the regulations of the health care markets in which so much federal spending takes place. Now, ultimately, even this kind of institutional change to the budget process can only facilitate sound policymaking, not force it. But that still beats retaining the debt limit, which itself forces unsound policymaking.
The current attempt to extort policy change with the debt limit illustrates this nicely. All it has accomplished so far is that Republican members of Congress felt compelled at this year’s State of the Union to stand and applaud the notion that Social Security and Medicare are untouchable. If you care about America’s long-term budgetary health, that is worse than nothing.
Writing from a naive household economics viewpoint, this budget process looks to me like the process preceding financial collapse of so many hippie communes, ideology displacing common sense.
A more promising workaround has been discussed recently. Issue "premium bonds" with a high coupon rate. They will sell at auction for a multiple of their face value, and can then be used to retire existing debt. It's artificial but much less so than the platinum coin, and arguably less so than the current emergency measures, which were controversial when they were introduced in the 1980s.
Politically, the great merit of these measures is that the Administration controls the timing of the whole process. If a government shutdown becomes necessary, they can time it to cause maximum harm to the Republicans.