Like the debt ceiling can't hold us
The game of chicken in Washington over raising the debt ceiling—the maximum that the federal debt can be—may look like politics as usual, but it's not. It's far worse and puts livelihoods at risk.
Suddenly, last week the debt ceiling got real. Treasury Secretary Yellen and the Congressional Budget Office separately announced that we might hit a hard borrowing limit as soon as June 1. The moment of reckoning is less than a month away, and there’s a Grand Canyon of a chasm separating House Republicans and the White House on the conditions to raise the ceiling.
It’s harmful and absurd.
The debt ceiling is not some abstract concept that only affects politicians in DC and some high rollers in financial markets. Not raising it in a timely fashion will affect all Americans. What happens if Congress doesn’t act?
Numerous obligations would presumably not be paid in full, like Social Security and Veterans benefits, Medicare, payments to states, food stamps, as well as interest payments on the federal debt. When the tax revenues and other income to the government aren’t enough, the Treasury must borrow. Usually, there are no constraints on how much the US can borrow. It prints money. But when we hit the debt ceiling, the US government is artificially constrained from being able to borrow and meet its obligations. That denies families, small businesses, and localities the income they were promised—income that many can’t do without.
Not raising the debt ceiling is a refusal to pay what we owe. Doing so would be a massive, unforced policy error. Stephanie Kelton nails it:
Imagine you walk into a restaurant with a group of friends. You ask for a table for six, and you follow the hostess to a booth. Everyone studies the menu and then places an order. A draft beer and a bacon cheeseburger. Pinot Noir and a medium-rare steak. A glass of chardonnay and the red snapper. Mushroom risotto and a Diet Coke. An old-fashioned and braised pork chops. Chicken Alfredo and a glass of Sauvignon Blanc. The waiter takes the order to the kitchen, and the chefs begin to prepare the meals. By ordering the food and drinks, you’re committing to pay the tab. Now suppose everyone gets up and walks out, stiffing the restaurant instead of paying the bill.
Before you order, not when it’s time to pay, you should discuss how much you want to spend. Budget time is the time to set the budget. Currently, Republicans are putting the horse before the cart, and the cart and horse are both in danger now.
The danger is real and multi-faceted, as David Wilcox, a former senior officer at the Federal Reserve, explained:
The fallout from a monthslong standoff would be even more dire, with gross domestic product plummeting faster than at any time other than the second quarter of 2020, when much of the economy was shuttered in response to Covid-19. There’s also a risk that millions could be thrown out of work. Over the longer term, damaged investor confidence and the resulting increase in US borrowing costs would exact a continuing toll.
See also his excellent conversation with David Beckworth on the Macro Musings podcast, as well as the one with Michael Strain, a director at the American Enterprise Institute, on the debt ceiling. They expand on many points in my post and more.
Let’s get serious.
The debt ceiling is a crisis of Congress’ making, and we know how to deal with it. Raise the debt limit. Save the budget debates for budget time. Since 1960, Congress has raised it 78 times, and in the vast majority of cases, including during the Trump Administration, Congress raised it without hesitation or drama. Two recent exceptions were the showdowns in 2011 and 2013. Even though there was no default, that first one led to a downgrade of the US credit rating from AAA to AA+, making it more costly to borrow and worsening the federal debt.
It’s even worse now. President Biden insists he will not make a deal with Republicans on spending cuts to raise the ceiling, and House Speaker McCarthy says he will not raise it without massive spending cuts. It’s a trainwreck, and we are all on the track.
Now is not the time to mess around:
Claudia Sahm is worried that the US is “in a fragile place” and couldn’t withstand the shock of a smash-up over the debt ceiling. She also doesn’t think politicians are being serious about the dangers, starting with the House Republicans.
Frighteningly many Republicans and their economic advisers think the dangers of breaching the debt ceiling are being overblown, and it’s worth playing hardball:
House Republicans increasingly make clear that they will refuse to raise the debt limit unless President Biden agrees to massive spending cuts that he has so far rejected. On Wednesday, the House voted, largely along party lines, for Speaker Kevin McCarthy’s (R-Calif.) plan advancing this approach. Conservatives within the GOP have been emboldened by the advice of a competing faction of right-wing policy analysts and economists, who have pushed GOP leaders to stay aggressive. Led by former Trump budget director Russ Vought, these advisers have maintained that the costs of inaction on the nation’s $31 trillion debt override the need to ensure the U.S. can pay all its bills.
But that’s a very risky bet.
Any legislation that ties conditions to getting the debt ceiling done is risking it not getting raised. Now is not the time to work on these other policies, said Claudia Sahm. While it’s good they recognize the debt limit is serious, we also need to be serious about getting it raised — and the path to that is not getting bogged down in debates about other issues.
Most of all, their blasé attitude about defaulting is an ominous sign of how this ends.
We have much to lose now.
The past three years have been trying, with a pandemic and a war in Ukraine. The last thing we need is another harmful event. We have made much progress, which is now at risk. So what exactly is at risk?
The strong labor market
On Friday, we learned that in April, the state of the labor market is good! And that’s very good for our workers We are getting back in balance, which is hard for some sectors like tech, but we are filling jobs, and unemployment remains very low.
Despite all the gloom and doom around us, we are not in a recession, and as one of many signs, the Sahm rule is zero, far below its trigger of 0.5 percentage point. Of course, that doesn’t mean we can’t be in a recession later this year. Even so, we should celebrate this moment. Don’t take it for granted; fight for it.
Workers have withstood the Fed’s rate hikes and high inflation so far, but a failure to lift the debt ceiling would likely be too much. A default on the federal debt and not paying beneficiaries would be extremely difficult for the economy to withstand. When the consumers don’t get their checks, they don’t shop; if they don’t, the jobs go away. And so on. The jobs recovery, the high wage growth, especially at the bottom, and the expansion of full-time work are big wins we could lose. Raise the ceiling.
An equitable recovery
The economic recovery has strengthened our safety net, bolstered the finances of many, and offered opportunities to workers who had been on the sidelines. I describe some of the wins in my recent post, including for Black workers, workers with disabilities, food security, health insurance, and access to banking:
The progress was not a stroke of good luck. We have had little of that in recent years. It was the big and bold efforts from Congress—about five trillion dollars in total— to get everyone to the other side of the pandemic and back to some semblance of normal. Many Americans made it back better than normal, and those who benefited the most from the relief were often the ones who had been left behind before the pandemic.
Refusing to raise the debt ceiling and causing a recession would undo many of the benefits we got from that $5 trillion, more than half of which passed during the Trump Administration. Raise the ceiling.
And here’s me on NPR:
We have so much to lose right now. I feel very strongly about the recovery in jobs. We've closed a lot of the inequities or started to close them in the U.S. economy. This would be a massive unforced policy error, and it could be very disruptive in people's lives, and I don't see the point. So to me, that is the frustration. And I'm not optimistic about it, but I'd love to be proved wrong. Like, we really could get this to the finish line, and we really should.
The full faith of investors who we borrow from.
The United States is the world’s dominant reserve currency. And here’s the Congressional Research Service on its implications:
The U.S. economy generally benefits from the dollar’s status as the world’s dominant reserve currency, once famously referred to as the United States’ “exorbitant privilege” by France’s finance minister in the 1960s. Because many central banks and financial institutions around the world want to hold U.S. dollars and dollar-backed securities like U.S. Treasury bonds, there is strong demand for U.S. dollars. That demand, in turn, allows the United States to borrow more cheaply (at lower interest rates) than it would otherwise.
A trainwreck in Washington DC, and defaulting on debt payments to investors will shake the confidence in our country:
The U.S. dollar is currently the primary global reserve currency, dominant largely because it is considered to be stable. “U.S. debt is frequently viewed by global financial markets as one of the safest assets in the world,” said Rachel Snyderman, the senior associate director for economic policy at the Bipartisan Policy Center. “So if our debt starts to be priced on our nation’s willingness to pay our bills, rather than our ability to pay our bills, the ramifications could range from short term market confusion and preliminary uncertainty to really long term economic damage that would extend far beyond our borders.”
Losing its status as the dominant reserve currency would be a serious blow to the United States; even chipping away at the confidence is bad. Higher borrowing costs won’t just hurt people today; our kids and grandkids would likely bear those needlessly higher costs. Wake up. Raise the ceiling.
There is no knight in shining armor, only Congress.
Congress must raise the debt ceiling. No one else can do it.
Fed Chair Jay Powell was crystal clear that the Fed cannot rescue us.
I don't really think we should be -- we shouldn't even be talking about a world in which the U.S. doesn't pay its bills. It just -- it just shouldn't be a thing. And, again, I would just say we don't -- no one should assume that the Fed can do -- can really protect the economy and the financial system and our reputation globally from the damage that such -- such an event might inflict.
The debt ceiling is “a thing,” and we must talk about it. No one should expect that the Fed will rescue us. Ask Lehman. The politics are very complicated here; asking the Fed to override the will of Congress is exactly the kind of thing that would tie it, rightly so, in knots. The Fed considers its independence from Congress and the White House sacrosanct, it would not overrule Congress or break laws. And even if the Fed did step in, exactly what do you want them to do? There is no playbook for stabilizing markets while the US government is defaulting. Maybe ten new lending facilities would do it. Probably not.
So, we are left with Congress. Their record in financial crises is not inspiring. In September 2008, Congress, during the turmoil in financial markets after the bankruptcy of Lehman, voted down a Troubled Asset Relief Program (TARP), a bailout of markets. Markets went into free fall. I sat at my desk at the Fed, hitting refresh on the Wall Street Journal homepage repeatedly, watching stocks go lower and lower. How could Congress not act? Three days later, they came back and passed the bailout legislation. The stock market had gotten their attention. This time, with a default, it would be harder to walk it back.
Congress must lift the debt ceiling. It’s as simple as that. There are some tricks like minting a trillion-dollar coin, invoking the 14th Amendment and ignoring the debt ceiling, and issuing premium Treasury bonds. None of these are good ideas in terms of economics or politics. Bi-partisan legislation that raises the debt ceiling with no conditions is what should happen. But if Congress doesn’t do its job, then the Administration should try the least bad of the tricks. To me, that’s the 14th Amendment approach: nuke the debt ceiling forever by ruling it unconstitutional. Enough is enough. But the coin has the appeal that it would underscore the absurdity of it all. The debt ceiling truly is absurd.
It’s not unprecedented in crises for policymakers to pull out arcane, never-used legal powers. That’s basically what the Fed did using Section 13(3) in March 2008. It was the first time since the Great Depression that the Fed made a loan to a non-depository institution, in that case, a loan to JP Morgan to buy Bear Stearns. The Administration says it has taken no option off the table. Good. Now, it’s time to put one on the table and raise the debt ceiling, whatever it takes. Do it now.
Raise the debt ceiling.
Do it now like the ceiling can’t hold us.
Postscript: Still unconvinced? Then listen to Macklemore.
Can we go back? This is the moment
Tonight is the night, we'll fight 'til it's over
So we put our hands up
Like the ceiling can't hold us
Like the ceiling can't hold us
Can’t Hold Us by Macklemore & Ryan Lewis
Forget raising the debt limit. Eliminate it. It serves no purpose except to be weaponized by Congress.
Powerfully persuasive and well written. Probably beyond the bounds of your economic argument, but we must not overlook the massive actual concrete immediate harms inflicted on individual Americans across the board by a government halt and default.