It was nice while it lasted. In 2019, Democrats, Republicans, and President Trump agreed to legislation suspending the debt ceiling through the 2020 election, kicking the can on a showdown over one of Washington’s most notorious and most dangerous sticking points. Thank goodness too, because what a year for debt 2020 was. Six major bills totaling over $5.3 trillion were enacted as a response to the coronavirus, the related recession, and to aid the nation’s economic recovery.1If you’re keeping score, that’s almost three times more than was spent on the entire 2008 Financial Crisis and subsequent Great Recession. With a current national debt of over $28.4 trillion, which is $8 trillion larger than it was at the beginning of President Trump’s term, the 2019 suspension could not have been more prescient or prudent.
No longer. Congress is barrelling towards a debt ceiling showdown in the coming weeks as the suspension concludes July 31. Treasury Secretary Janet Yellen has already raised alarms, calling on Congress to quickly raise or suspend the ceiling before August. Thus begins yet another cycle of Washington’s most notorious and most unnecessary budgetary crisis.
If this all rings a bell, it’s because it happens pretty regularly. In fact, between 1962 and the 2011 crisis, the debt ceiling was raised 74 times. It’s not always a crisis. It used to be far more routine and far less politicized than it has been in the last decade. But the reason you’re vaguely recollecting debt ceiling drama that piqued the national interest is because of two critical showdowns: the 1995-1996 debt ceiling crisis and government shutdown and the 2011 debt ceiling crisis.
An Escalating Crisis
The crisis beginning in 1995 revolved around a disagreement on spending between the Republican-controlled Congress headed by House Speaker Newt Gingrich and President Clinton. The congressional Republicans who were swept into power during the Republican Revolution of 1994 had run on curtailing government spending and what they perceived as a runaway size of government.2They were blissfully unaware of the fact that the debt as a percent of GDP jumped from 31% to 64% under Presidents Reagan and Bush, but was only 65% in 1995, and that the size of the federal government had actually decreased in the early 1990s. Clinton refused to cut the budget, so Gingrinch and the Republicans embarked in a game of chicken in which they threatened not to raise the debt limit unless he would agree to budget cuts. This set up a dual crisis, an impending government shutdown as well as the danger of breaching the government’s debt limit. Failing to reach an agreement, the government shut down (twice) until Republicans relented.
The 2011 debt ceiling crisis played out similarly, though a looming shutdown did not coincide with the impending ceiling. Republicans led by House Speaker John Boehner and Senate Minority Leader Mitch McConnell insisted on budget cuts which President Obama and Senate Majority Leader Harry Reid opposed. By May of 2011, the debt ceiling was hit and the Treasury Department resorted to “extraordinary measures” to avoid the government defaulting on its debts — more on exactly what this means in a bit. By the end of July, an agreement was reached to reduce the deficit and raise the debt ceiling and on August 2, the day the Treasury had estimated it would finally default, President Obama signed the bill, the Budget Control Act of 2011 — famous for creating “sequestration” and the “Supercommittee” (the Joint Select Committee on Deficit Reduction) — very narrowly avoiding catastrophe. This incident also resulted in the first and only credit downgrade in the United States’ history, as Standard & Poor’s reduced the country’s rating one step below prime to AA+, where it remains to this day.
Paying for What You Paid for
So what exactly is all of this bickering, posturing, and drama about? And why is it a crisis? Simply put, the debt ceiling is a borrowing limit that Congress sets for the United States federal government. It has nothing to do with actually authorizing any new spending or appropriating funds anywhere. As the Treasury Department notes, “It simply allows the government to finance existing legal obligations that Congresses and presidents of both parties have made in the past.“ The intent in setting this self-imposed limit is supposedly to tamp down Congress’ impulses to spend too much, but that over-simplification is divorced from the reality of government spending which includes entitlements such as Social Security and Medicare. It is also raised routinely, often whenever there’s an increase in spending or a tax cut.
To recap, the debt ceiling has no effect on actual spending, it’s raised consistently, and it occasionally causes crises. Recurring haggling and brinkmanship over the debt ceiling is little more than a reappearing quarrel over whether the government will pay for things it has already said it will pay for. So why does it matter?
Well, if that limit is breached, things start to get scary. That’s why Treasury and Federal Reserve officials tend to get quite vocal in the months before the ceiling will be hit. Every day, the government borrows money by issuing debt to pay for its obligations — discretionary spending, entitlements, and paying off current debts coming due — but, by law, thanks to the debt ceiling, it cannot borrow funds above its limit. Once it hits that limit, the Treasury can deploy extraordinary measures to continue to meet obligations without incurring more debt. These include measures such as interrupting investments into federal retirement funds, suspending reinvestment into the Exchange Stabilization Fund, and ceasing sales of state and local government securities. Needless to say, these do not often provide much additional time before the government defaults, but as the 2011 crisis demonstrated, these bought time (or — counterargument — extended the length of time in which to play chicken with the faith and credit of the United States) for an eventual deal.
The Nightmare Scenario
And if the U.S. government reaches a position where it cannot pay off debts due that day? Crisis turns into catastrophe. For starters, the United States — which has never in its history defaulted on its debt3Technically… not because it was barred from doing so but because of staffing and technical issues, the U.S. government was delayed in paying its bills in April of 1979.
And technically… there was sort of an engineered default (or at least, debt restructuring) in 1933 related to taking the U.S. off of the gold standard that it’s been argued was a default.
And technically… during the War of 1812, the U.S. government failed to pay bondholders on time, but given that the city of Washington was under attack and the White House and Capitol were aflame, that one can probably be excused.
So given that one of these was best described as an accident, another was intentional, and the third was because the Treasury was literally on fire, we can forgive pundits pontificating that the U.S. has never defaulted on its debt. — would fail to meet its obligations to its lenders. Interest rates would jump as the U.S. government suddenly goes from being the safest investment in the world to, well, not. This alone would increase borrowing costs for the nation which, as noted, faces $28 trillion in debt — which while tenable in our low interest rate world, could become problematic if rates rise over the economic growth rate. But the worst would be yet to come. Having the faith and credit of the largest economy in the world come into question would be a nightmare of its own, but that credit drying up for a nation who holds disproportionate sway in global financial markets and business would be devastating. In 2011, Standard & Poor’s said as much. “The impact of a default by the U.S. government on its debts would be worse than the collapse of Lehman Brothers in 2008, devastating markets and the economy. Should a default occur, the resulting sudden, unplanned contraction of current spending could see government spending cut by about 4% of annualized GDP. The economy would fall back into a recession.”
Therein lies the difference between two oft-conflated crises: a government shutdown and a debt default. A shutdown is manageable, the government never really shuts down after all — it just runs at a diminished capacity and a lot of folks aren’t getting paid. It’s bad, but not the end of the world. Shutdowns happen because Congress has not appropriated money to keep the government funded. A debt default would almost certainly induce recession, infect financial markets across the world, and put a permanent blot on the world’s safest asset. The bedrock of the world’s economy that is the U.S. dollar and U.S. debt will have been and will be in doubt.
The analogy of the U.S. government spending on its “credit card” and needing to balance its budget like American households must is a bad metaphor that dramatically oversimplifies and trivializes the difference between governments and individuals. But if you must, think about a shutdown as not having your paycheck yet, so you’re unable to go to the grocery store versus a debt default as failing to pay your credit card bill or your rent. A shutdown is an inconvenience that will set you back a few days; the debt default will harm your credit worthiness, your ability to borrow, and your financial situation for years, potentially decades.
As dangerous and catastrophic as it may be, the reality is that the U.S. government has flirted with this disaster and come uncomfortably close before. And as our government has been increasingly utilized as a tool against itself, and as a significant part of the Republican Party has demonstrated a willingness to destroy the country’s institutions for partisan gain, a default scenario is a matter of when, not if. In fact, it’s on that path again now, as congressional Republicans have spoken of using the impending debt ceiling deadline to “insist on dollar-for-dollar spending cuts as part of a debt ceiling increase ahead of a July 31 deadline.”
So Just Get Rid of It
The debt ceiling serves no purpose other than a near-annual panic. You could claim that it invites regular discussion and deliberation as to the scale and scope of our national debt but, given the persistent increases even as the debt ceiling has been increasingly militarized, that argument seems dubious. It exacerbates polarization and congressional brinkmanship. And it places economic and financial destruction at the mercy of politics.
The best option is to abolish it. It hasn’t always been in place, after all. Forms of the debt ceiling existed as early as 1917 and the Public Debt Acts of 1939 and 1941 effectively consolidated the debt ceiling to what we know it as today. Most other rich countries do not have debt ceilings. In the OECD, a club of mostly rich countries (to take the Economist’s description), Denmark and Poland are the only other countries who have a debt ceiling. And Denmark effectively (at least temporarily) eliminated its ceiling by raising the debt ceiling over double its existing level. Yes, the U.S. Senate has its tricky filibuster and finding 10 Republicans to agree to abolish the legislative limit entirely would be unlikely (former GOP presidential nominee and current Utah Senator Mitt Romney, who would need to be part of any potential bipartisan coalition to eradicate it, doesn’t seem likely to do so given his statements back in 2011, and actions in 2019). But, as solely a budgetary matter, it’s been suggested that this could be done in the United States under reconciliation, a parliamentary work around, to raise the level to a ludicrously high level (quadrillions of or a googol of dollars, for example) without abolishing the legislative requirement outright.
It’s possible to take the debt ceiling out of the equation entirely. And there have been increased calls to do so — perhaps most notably from (at the time) Federal Reserve Chairman Ben Bernanke, once again reiterating that abolishing it simply “gives the government the ability to pay its existing bills… It doesn’t create new deficits. It doesn’t create new spending.” As America’s government stretches further into an uncivil war, it’s only a matter of time before the financial system is weaponized, and where the nation’s financial collapse is worth it at the expense of the other party.
Washington wrote an unnecessary crisis for itself into law, therefore Washington can — and now must — write it out.