Inside the Beltway, jockeying over raising the debt ceiling has become a partisan ritual to gain political points. But marching toward a debt ceiling default puts American living standards on the line.
First, let’s look at how we got here.
Over the last decade, Congress has authorized trillions of dollars in spending, tripling the national debt since 2009. The Treasury Department borrows money to make payments on that debt. Because there is a congressionally mandated debt limit, lawmakers routinely bump into the ceiling on what can be borrowed, and must raise it.
Under former President Donald Trump, Congress suspended the debt ceiling three times. Under former President Barack Obama, Congress raised the ceiling eight times. Since 1960, Congress has acted 78 separate times to “permanently raise, temporarily extend, or revise the definition of the debt limit,” according to the Treasury Department. Of those actions, 49 were under Republican presidents and 29 were under Democrats.
For most of that time, the debt ceiling was raised with little fuss, until 2011 brought the debt ceiling into a new dangerous realm of political brinksmanship.
A fight over government spending locked President Obama and Republicans into a battle that triggered a downgrade of the US credit rating and a stock market slide. Ironically, that fight about too much debt added to the cost of that debt. The Congressional Budget Office estimated the delay in raising the debt ceiling in 2011 raised US borrowing costs by $1.3 billion that year.
Extraordinary measures
The United States hit the debt limit on January 19. Because Treasury cannot borrow more money and add to the debt, Treasury Secretary Janet Yellen authorized her staff to execute so-called extraordinary measures.
In a January letter to Congress, Yellen warned that “it is unlikely that cash and extraordinary measures will be exhausted before early June.” Depending on how much the Treasury brings in this tax season, the “X-date,” or the day when the United States would default, could shift.
Until then, Treasury staffers are implementing accounting maneuvers to maintain cash flow, including suspending reinvestments from some government pension funds and savings plans and delaying auctions of some securities to make sure all the bills are paid on time.
Yellen is expected to update her projection in the near future.
Irreparable harm
Not raising the debt ceiling would be catastrophic.
Without enough money to finance all its operations — such as national defense, Social Security and Medicare — swaths of the economy would freeze. For Yellen and the Treasury, it would become a hunger game of which bills to pay and who gets an IOU instead.
Economists at Goldman Sachs estimate that one-tenth of all economic activity would stop. Center-left think tank Third Way calculates three million jobs lost, a crippling spike in interest rates and an extra $130,000 on a typical home loan.
Moody’s estimates that even a brief breach of the debt limit would kill almost a million jobs.
In a speech Tuesday, Yellen said “a default on our debt would produce an economic and financial catastrophe,” and noted that over the longer term, a default would “raise the cost of borrowing into perpetuity. Future investments would become substantially more costly.”
Measuring the damage is made even more difficult by the fact that so much of the economy is fueled by confidence. A default on the debt would trigger market crashes that would crush business and consumer confidence that could further shock the financial system and throw the economy into a recession.
Economists, in general, are horrified that America’s creditworthiness is on political display so often, calling it irresponsible.
“This is the United States of America,” renowned economist Ken Rogoff told CNN. “It affects everyone getting Social Security checks, debt holders. I don’t even know where to stop. You can get hyperbolic about how bad it will be. I would just say I don’t want to find out.”
Global reckoning
Moody’s Analytics chief economist Mark Zandi has described a default as “financial Armageddon.” And the chaos would go global.
The creditworthiness of US Treasury securities underpins the global system and sparks demand for US dollars that makes the dollar the world’s reserve currency. Losing confidence in Treasuries could spark mass selling of dollars with reverberations around the world, especially for high-debt developing countries.
And it provides an opportunity for America’s competitors, writes Noah Berman for the Council on Foreign Relations.
“Dollar instability could also benefit aspiring great-power rivals such as China. Though Beijing has long sought to position its renminbi as a global reserve, the currency accounts for under 3% of the world’s allocated foreign reserves.”
Get rid of it
In theory, the debt ceiling should act as a sort of fiscal restraint during the budgeting process. But after near meltdowns in 2011 and 2013, many argue it’s time to take the political football off the field. The time for tax and spending choices by Congress is through the normal course of business. Deciding later not to pay the bills by not raising the debt ceiling is not sound fiscal policy.
Roger Ferguson, economist and former vice chair of the Fed, said the debt ceiling is out of date.
“Congress should eliminate the debt ceiling completely, or at least tie it to spending such that the debt limit increases automatically whenever a spending bill passes. It is time for the United States to leave behind this antiquated mechanism that brings the country to the precipice of default every few years.”
