The Pointless Debt Ceiling Crisis
How Gutless Politicians Play Chicken with Our Lives
Welcome to the Civic Way journal, our quick take on the relevance of current events to America’s future governance. The author, Bob Melville, is the founder of Civic Way, a nonprofit dedicated to good government, and a management consultant with over 45 years of experience improving public agencies.
The Different Faces of Debt
Debt is a funny thing.
We all hate personal debt. We spend years paying it off. But, when it comes to public debt, our views—if we have any at all—are informed by our politics.
Those on the right hate debt when Democrats are in control but seem more forbearing when the GOP is running the show. Those on the left decry reckless tax giveaways when we have a Republican President but seem blissfully nonchalant about deficits when Democrats grab the reins.
This partisan hypocrisy is most evident with a debt ceiling crisis or government shutdown. A debt ceiling crisis—like today’s spectacle—occurs when lawmakers refuse to raise the federal debt limit. A government shutdown occurs when Congress fails to enact appropriation bills for the coming year[i].
Refusing to raise the debt ceiling[ii] is not about reducing deficits, but rather dishonoring the nation’s obligations. It is kind of like buying a car with a loan, driving the car home, and deciding to skip loan payments. You may initially save a few bucks, but your car will be seized and your credit damaged. Treating the car purchase and car loan as separate decisions is irresponsible and costly.
However, it is also careless to spend beyond our means. If we get a case of buyer’s remorse about a car, it is smarter to restructure the loan, tighten our belts and increase our income. Failing that, we should sell the car, pay off the loan and buy a more affordable car. While we are at it, we should revamp our household budget process. Sound advice for Congress and the White House.
Confronting the Debt Ceiling
The debt ceiling is widely misunderstood. Raising it doesn’t create or increase federal debt[iii], it just allows the Treasury Department to borrow more funds for bills already incurred. That is, it doesn’t create the obligation, it merely enables the government to honor it.
The debt ceiling is like a credit card limit. When you max-out the credit card, you need a higher limit to keep using it. If the credit card company refuses to raise your limit, you still have to pay what you have already borrowed. You don’t get to walk away from the debt because the limit wasn’t raised.
The US government’s debt ceiling mechanism[iv] is a unique political contrivance. Virtually every other nation or state government approves debt concurrently with their budget or appropriation[v]. They effectively approve debt when they approve the annual budget and appropriations[vi].
For years, legislators from both parties treated the debt ceiling approval as a formality. From 1962 to 2016, Congress raised the debt ceiling 80 times including 18 times under Reagan and 11 times under Obama. Until recently, both parties have voted to increase it—without drama and well in advance.
It is time to rid our nation of this political contraption.
The Threat of Default
If the Republicans and Democrats don’t reach an agreement to raise the debt ceiling, the US government will default on its debt. Default would be unprecedented and likely have enormous consequences for the nation and world.
According to the Treasury Department, the government hit the debt limit in January. It has been able to temporarily postpone default by delaying some payments. However, Treasury Secretary Yellen recently announced that the Treasury could be forced to default on the government’s bills by June 1. The Bipartisan Policy Center predicted default between early June and August.
Who will be affected by default? Millions of Americans and many more throughout the world. Since US government debt is the world’s most widely held security, few nations are immune. In the US, all federal obligations would be jeopardized—Social Security, Medicare, trust funds, public retirement plans, veterans’ benefits, SNAP benefits and federal salaries. And, ironically, since debt interest payments would be halted, our credit rating would be downgraded[vii], increasing borrowing costs.
Congress has always lifted the debt ceiling in time. So, we can only speculate about the broader impacts of default. Still, given the long-standing credibility of US debt, the prospects are frightening. Suspended services. A stock market plunge. Ravaged retirement accounts. Millions of job losses. Global financial chaos and recession. America’s reputation in shatters. Putin and Xi Jinping elated.
The Appalling Political Theater
This debt ceiling crisis dominates our headlines. The GOP-controlled House of Representatives threatens to withhold their approval of the debt ceiling increase—and trigger default—if they don’t win big concessions from the Biden Administration. And the media loves a crisis.
This is not the first time that Republicans have used the debt ceiling limit for political purposes. They did so in 1995, 1996, 2011 and 2013. Each Braveheart moment involved GOP legislators demanding concessions from a Democratic President in exchange for a debt ceiling increase. The gambit? The President surrenders or risks fiscal Armageddon on his watch.
To be fair, individual legislators from both parties have tried to leverage the debt ceiling threat to win policy concessions. As Senators, both Biden and Obama voted against increasing the debt ceiling, but a majority of Democrats has always increased the limit in advance. This was true even when Trump was president and Democrats controlled the House.
In recent years, Republicans have been more aggressive, playing chicken with a Democratic president to the very precipice of default. Instead of reducing deficits when they are in charge, Republicans wait for the Democrats to win the White House. Then they pound their chests as budget hawks long after they have meekly approved the federal budget and associated deficits.
Not surprisingly, Donald Trump has emerged as partisan hypocrisy’s poster child. In December 2012, he encouraged the GOP to use the debt ceiling for leverage. In July 2019, when he was still president, he called the debt ceiling a “sacred thing” adding, “I can’t imagine anybody ever even thinking of using the debt ceiling as a negotiating wedge.” Perhaps we should get rid of it altogether.
The Nihilistic Republican Proposal
After weeks of silence, and only weeks before a potential default, the GOP leadership narrowly passed a bill addressing the debt ceiling. This bill could be their opening move or their only move.
GOP bill would enable the government to delay default by less than a year, but only on the condition of massive non-defense budget cuts. It would curb programs like TANF, SNAP, WIC, Medicaid and Head Start. It would cancel President Biden’s student loan forgiveness plan and rescind funding for more IRS enforcement (thereby cutting revenues). According to Moody’s Analytics, the GOP bill would threaten economic growth, increase unemployment and make recession more likely.
The GOP debt limit bill looks more like extortion than negotiation. In exchange for kicking the debt ceiling issue down the road for less than a year, it demands draconian funding cuts. Not to the programs that most need those cuts, but rather programs that don’t benefit Republican constituencies. And it certainly doesn’t include any cuts to tax loopholes that benefit GOP donors.
Instead of a genuine effort to reduce deficits or commence a negotiation, the GOP bill looks more like the nihilists’ clumsy kidnapping ploy in the Big Lebowski. “Give me the money, Lebowski.”
The Ballooning Federal Debt
The Republican position on the debt ceiling issue is hypocritical and reckless, but the Democratic indifference to debt is irresponsible, too. Together, their budgetary folly has been disgraceful.
The federal debt has become a grave threat to our future. For many years, even liberal economists assured us that so long as our debt did not outgrow our economy, it was manageable. Today, the federal debt exceeds the Gross Domestic Product (GDP), a proxy indicator of the US economy’s size.
Since 1980, with the exception of Clinton’s last budget, we have run up deficits and accumulated more debt in good times and bad. The federal Debt/GDP ratio surged from 32 percent in 1980 to 55 percent in 1990 during the Reagan-Bush years. It rose again during George W. Bush’s presidency to nearly 68 percent (due to the Bush tax cuts, Afghan/Iranian wars and Medicare Part D expansion).
During Obama’s presidency, due primarily to the 2008 fiscal crisis and Great Recession, the Debt/GDP ratio jumped to 105 percent. The 2013 Obama-Republican debt ceiling deal extended the Bush tax cuts and added an estimated $4 trillion in debt over ten years. Since 2016, the federal debt has soared even more, due in large part to the 2017 tax cuts and 2020-23 pandemic, peaking at nearly 135 percent.
US government spends about $1 trillion more each year than it collects in revenue. As America’s annual deficits rise, they will generate exorbitant interest costs. And, according to the Office of Management and Budget, interest costs already exceed the aggregate costs of several key programs[viii]. Unless our lawmakers take action, the annual deficits and cumulative debt will continue to grow.
If personal debt is a sign of weak character, what does government debt say about us and the people we elect? Uncle Sam is looking a bit like Wimpy in the old Popeye cartoons—“I’ll gladly pay you Tuesday for a hamburger today”—or perhaps a more contemporary slacker like Jeff Lebowski (aka the Dude) writing a check for a carton of milk.
Unmanageable debt is more than a blot on our national character. It also limits the fiscal flexibility of our government. The more we spend on interest the less we have available to spend on essential programs. The more debt we carry, the less capable our government will be to tackle the next crisis. Is that the kind of government we want to leave our children?
Reforming Our National Budget Process
It is too late to elect better people to Congress, and it is virtually impossible to get rid of them (George Santos still holds office). But we can threaten them with electoral default if they continue their reckless antics around the debt ceiling.
Instead of watching them play politics with our lives, we can demand that the President and Congress take the following bipartisan measures:
Approve a two-year debt ceiling hike by June 1st
Appoint an ad hoc task budget reform force of nonpartisan budget experts and hawks comprising representatives of bipartisan groups like the Concord Coalition and Bipartisan Policy Center and a cross section of liberal and conservative groups
Direct the task force to recommend budget process reforms and a six-year budget plan that puts the federal government on firm financial footing (provide the task force with a budget balancing formula such as $2.00 in tax expenditure reductions—or new taxes—for every $1.00 in program cuts)
Require the task force’s recommendations to be put before the US House and Senate for an up or down floor vote (circumventing the committee process) by December 31st
If Congress refuses to raise the debt ceiling by June 1st, the President, should invoke the 14th Amendment, declare the debt ceiling law unconstitutional and continue honoring previously agreed upon debt obligations. This may incite radicals in Congress to “blow crap up,” as Texas Congressman Chip Roy promised, but that threat pales in comparison to the risks of default.
It should not be unreasonable to expect our elected representatives to do two responsible things at the same time—honor our obligations and control the budget. We must not only avoid the nation’s first default but take serious steps to reform our federal budget process, starting with the elimination of the debt ceiling law.