Another Debt Limit Fight
I'm Already Over It
Here we go again. We’re now facing another debt limit fight, and I couldn’t be more over it already. This is partially because the media is focusing on it like an economic catastrophe is imminent. Maybe the media has always portrayed it this way, and I’m just paying attention now. Anyway, I’m dog-sitting this week, and while I was out on a two-mile jaunt around the neighborhood, I got a text from my girlfriend that read, “I need you to tell me if CNN is exaggerating the dangers of defaulting.” I ended up calling her on my way into the office to explain what it means.
The statutory debt limit set in 31 U.S.C. §3101 note was reached on Thursday, according to a letter from Treasury Secretary Janet Yellen to Speaker Kevin McCarthy (R-CA). The Treasury Department will now use extraordinary measures to meet the United States' debt obligations. In this instance, extraordinary measures consist of suspending investments to and redeeming investments from the Civil Service Retirement and Disability Fund (CSRDF) and the Postal Service Retiree Health Benefits Fund (PSRHB). This round of extraordinary measures is expected to extend any potential default through June 5.
The CSRDF and the PSRHB would be made whole when the statutory debt limit is increased or suspended. There are also other steps the Treasury Department can take, including suspending investments to the Exchange Stabilization Fund, issuing debt from the Federal Financing Bank, and suspending the issuance of State and Local Government securities.
House Republicans want to trade reductions in spending for any increase to the debt limit. I’ve written about how Republicans squandered spending reductions that they got through the Budget Control Act of 2011. The situation was similar. There was a Republican-controlled House, a Senate run by Democrats, and a Democrat in the White House.
Granted, hyper-partisanship is a much, much bigger problem today than it was then. The White House and Senate Democrats want a clean debt limit increase. Presumably, this means an increase in the statutory limit, rather than a suspension of the debt limit. House Republicans may have problems internally. Keep in mind that McCarthy can’t lose more than four votes on any bill that he wants to pass. If Republicans in swing districts begin to get nervous or lose patience with trying to leverage the debt limit for spending cuts, conservatives may be left with nothing.
Look, we do need to get our fiscal house in order. We’ve seen the impact of bad fiscal policy decisions in past more than year. Although the are other factors that have contributed to inflation, Congress can’t pump trillions of dollars into the economy and not expect inflation to be a problem.
The United States has had a statutory debt limit since 1917. It has existed in its current form since 1939. Some say that only the United States and Demark have an explicit statutory debt limit as a dollar amount. That’s true, but it’s also misleading. Other countries have guardrails in place for debt. Germany and Switzerland have a debt brake (schuldenbremse), for example. Poland sets its debt limit at 60 percent of GDP. The debt limit has been weaponized in the United States, though. It has become another example of gamesmanship. Rarely, though, anything changes in terms of spending.
I went through the numbers as I was writing this post. On September 30, 2001, the share of the debt held by the public was $3.339 trillion. When President Obama took office, it was $6.307 trillion. When his successor took office, the public debt was $14.403 trillion. When President Biden took the oath, it was $21.636 trillion. As of January 18, 2023, the share of the debt held by the public is $24.529 trillion. Of course, debt-to-gross domestic product (GDP) is a better way to look at debt, but what we owe is shocking.
I went through debt limit fights at least a few times when I was at my previous job. We called for fiscal reforms, among other things. I recall attending a meeting in Eisenhower Executive Office Building in early 2017. The nascent administration was listening to conservative groups’ concerns about the debt ceiling. Congress would soon consider an increase in the debt ceiling, and the administration knew conservative groups were a potential problem. White House staffers wanted to know how to keep us from being a problem.
There weren’t many of us there, but the major fiscal conservative groups were represented. Virtually everyone in the room told the White House staffers who were there that the best way to address the issue was to get federal spending under control. That meant reforming entitlement programs like Medicare, Medicaid, and Social Security.
The former president made conflicting statements about the national debt and entitlement programs on the campaign trail in 2016. He told The Washington Post that he would eliminate the national debt in eight years, but he also pledged to “save your Social Security without killing it like so many people want to do. And your Medicare.” Not only that, he wanted big increases in defense spending. There was no chance that the national debt would be reduced. He saw to that.
When those of us who met with the White House pointed out that something had to be done about entitlement programs, the response we got back during the meeting was unsurprising but still frustrating. “That’s a fifth-year priority,” one staffer said. Obviously, calling entitlement reform “a fifth-year priority” was can-kicking. It assumed that there would be a fifth year. There wasn’t.
There were other ideas floated at that meeting and another one I attended in a large-group setting, including a Swiss-style debt brake to control outlays. This has been introduced in legislative form in recent years as the Maximizing America’s Prosperity Act. (Interestingly, there weren’t any House Freedom Caucus leaders on the bill as co-sponsors in the 117th Congress. Maybe it didn’t sufficiently “own the libs.”) As history shows, the White House wasn’t interested.
What happens if Congress doesn’t increase the debt limit? I don’t know. Granted, I don’t know if I’m a believer in the rhetoric about the calamity that could ensue if the United States were to default on its debt. That being said, I don’t know that I’m not a believer in that rhetoric. We had a partial default in 1979, and interest rates jumped as a result. The United States experienced a recession the following year. I’m not at all suggesting that the partial default was the reason for that recession, but rising interest rates to combat inflation were the primary cause. The same is true of the 1981-1982 recession, which was much deeper than the one in 1980, but we saw an economic boom as the economy recovered.
Lawmakers, regardless of party, have to consider the potential impact of whatever they do. Yes, we do need reforms to federal retirement and health insurance programs. That’s approximately 66 percent of all federal spending, and these programs are running out of money and, absent some form of congressional action, facing benefit cuts. The economy, however, is always fragile, and there are already concerns that we’re facing a looming recession. Default on our debt may accelerate that or exacerbate it.
The cost of borrowing is already on the upswing because of recent interest rate increases. A downgrading of the United States’ credit rating, through spooking markets or default, will have consequences throughout the economy. The dollar, which is the world’s reserve currency, would take a hit. The stock market would undoubtedly respond very negatively, which impacts Americans’ retirement accounts and more.
Would global catastrophe ensue if the United States defaulted on its debt? I don’t know, but I don’t want to find out.
Part of this post was borrowed from my weekly congressional update for Due Process Institute, known as
. That will come out on Monday. Other parts were borrowed from a post I wrote in February 2021.