Since the pandemic began, the government went on a spending binge for so-called pandemic "relief." That spending is coming home to roost and the U.S. government reached the debt ceiling on January 19th. The U.S. Treasury has implemented extraordinary measures that are set to expire on June 5th. In the interim, Congress is at a standoff.
The debt ceiling was created in 1917 by Congress to create a legal limit of how much debt the federal government can incur. As of January 2023, the U.S. government has incurred $31.4 trillion in debt. It has ran an average debt of $1 trillion every year since 2001. That is because Congress consistently spends more than it receives in taxes and other forms of revenue. To compensate for the rest, the U.S. government has to borrow. The debt ceiling is not about approving new spending, but rather about authorizing Congress to pay on previously enacted spending. As such, raising the debt ceiling has become routine procedure for Congress. Since 1960, Congress has raised the debt ceiling 78 times. You can read more about the debt ceiling from the bipartisan Committee for a Responsible Federal Budget (CRFB) here.
Given the number of times the debt ceiling has come into play, the debt ceiling looks more like a political football than a mechanism for financial discipline. Let's take a look at some Treasury data on the subject. In inflation-adjusted dollars, the U.S. debt has ballooned from $2.87 trillion in 1960 to $31.4 trillion. As for debt-to-GDP ratio, we went from 54 percent in 1960 to 124 percent in 2022.
Back to the political football, we seem to be at a moment of political intransigence. Biden does not want anything less than an unequivocal increase of the debt limit without a quid pro quo. The Republicans in the House are willing to increase the debt ceiling provided there are spending cuts. What happens if we do not increase the limit?
For one, we would need to gather $14 trillion either in spending cuts or tax increases to cover the difference. This amount is not quite double what the Department of Defense typically spends on an annual average. If the U.S. government cannot come up with the difference, it will have to default. If it has to default, the increase in interest rates would most probably make for larger spending cuts and tax increases, not to mention disincentivize investment in the United States. This would also affect other markets since over half of foreign currency reserves are held in U.S. dollars.
If the possibility of default is real and terrifying, what good does the debt ceiling do? For one, it can help bring debt issues to the attention of Congress and help Congress revisit policies that are driving the debt. We are in debt because Congress has a habit of spending more than it has. Congress is rarely going to change course unless pressured to do so, which is what the debt ceiling does. As the Right-leaning Manhattan Institute points out, every major deficit reduction negotiation between 1985 and 2011 was prompted by the debt ceiling.
The bipartisan CRFB suggests that the ideal solution would be to lift the debt ceiling as soon as possible while placing in measures to better ensure a more stable fiscal trajectory. I am inclined to agree with that statement, as do 63 percent of Americans, according to a January 2023 Harvard/Harris poll. There are considerable risks if we do not raise the debt limit and if we decide to default. I also do not want the United States to become another Argentina where we have to constantly make painful decisions about the budget and face enormously high interest rates.
That might seem like an exaggeration to compare the United States' fiscal position to Argentina, but look at where we are right now. We have reached enormously high numbers with no signs of slowing down the debt-to-GDP ratio. Conditions will not get better as Social Security and Medicare trust funds are set to expire, nothing to say of increased political polarization.
If Congress had fiscal discipline, the debt ceiling would act as a checkpoint to be mindful and reflective of federal spending, as well as provide an opportunity to adjust as necessary. Alas, we do not live in such times. I could be snide and say that the days of fiscal discipline from either party are behind us and we are irreparably screwed. But I would rather think that there is some hoping in staving off the United States having as dire of a budgetary status as Argentina.
As the libertarian Cato Institute brings up, this requires cutting spending. Cato Institute suggests creating a fiscal plan, reforming the major drivers of the federal budget (i.e., Social Security, Medicare, and Medicaid), and restoring the earmark ban. The bipartisan CRFB also suggests having the debate on the debt limit when Congress is making the decisions on spending levels, and not after. Another helpful suggestion from the CRFB is to tie the debt ceiling to the debt held by the public instead of what we do now with gross federal debt.
Congress is going to make tough choices now or even tougher choices down the road. I know that it is politically anathema to say we need to focus on real reform, especially when it comes to federal spending. One of the basic tenets of economics is that we live in a world of scarcity. There only exist a finite amount of resources, and we should find the best way to allocate those resources. It also means that Congress should stop acting as if money grows on trees because it does not. I know high levels of government spending are not new, but the pandemic brought it to a new level. Look at Biden's American Rescue Plan Act (ARPA). ARPA was supposed to create new jobs. While it did not create jobs. it was a major contributor to inflation. As of September 2022, the Biden Administration added nearly $5 trillion to the deficit. This profligate spending is not only unsustainable, but it is harmful in the long-run.
As I brought up in December 2020, we need to care more about debt than ever increased public debt makes it harder to save money, creates more obstacles to comfortably retiring, and stymies economic growth, all of which lower our quality of life. I do not want to live in a world of paying higher taxes in the future because Congress could not get its act together now. I would prefer to live in a country that is an economic powerhouse in no small part because Congress created a plan to manage the federal debt. Congress needs to act like the future of this country depends on getting debt under control because truth be told, it does.
Thanks for your erudite analysis. Agree with your analysis. Bottom line is that the "fiscally responsible" things to do are 1. NOT default on sovereign debt obligations already incurred. first and foremost. 2. Work in a bipartisan way to either increase taxes and government income (perhaps going after billions of dollars in tax cheats by fully funding the IRS) or work on cutting spending (I would suggest going after bloated defense department appropriations or perhaps building a few less billion dollar airplanes or winding down spending on nuclear arsenals!
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