Earlier this month, US Treasury Secretary Janet Yellen warned that the US will soon reach its outstanding debt limit, with the US national debt now amounting to $31.46 trillion. Last week, the Treasury said it had begun taking extraordinary measures to avoid a government debt default by temporarily suspending payments not immediately needed for essential programs.
According to the White House, President Joe Biden is expected to meet soon with US House Speaker Kevin McCarthy to convince the Republican-majority lower chamber of Congress to approve additional spending despite their calls for budget cuts.
Raising the Ceiling
The debt ceiling is the maximum amount of federal debt that the government can incur to finance its current obligations. The measure can be traced back to 1917, when Congress passed the Second Liberty Bond Act, which allowed the government to raise funds without requiring the legislature to sign off on each new bond issue. In 1939, Congress pooled all limits on various types of debt into the aggregate debt limit, originally set at $45 billion. Since then it has been changed over 100 times.
In recent years, the issue of raising the debt ceiling has been the subject of heated debate between Democrats and Republicans. Many GOP members believe that increasing the national debt in perpetuity is unsustainable. The most famous standoff took place in 2011 between then-President Barack Obama and the GOP-controlled House of Representatives, with the Republicans demanding corresponding cuts to spending. Back then, the two sides reached an agreement just two days before the government was about to run out of money.
The debt ceiling issue has since been increasingly treated by the two parties as a political football, raising doubts regarding its purpose and benefits. The current arrangement may have just outstayed its welcome, Eric Tymoigne, an associate professor of economics at Lewis & Clark College and a research associate at the Levy Economics Institute of Bard College, told Sputnik.
"The public debt grows with the need of the economy, like every private debt does. Government has little control over public debt dynamics given that most gov[ernment] spending is not discretionary and tax revenues are not discretionary at all. Debt limit is an archaic tool that serves no purpose, it should be eliminated," Tymoigne said.
In the same vein, Tymoigne's Levy Economics Institute colleague Marshall Auerback described the debt ceiling as unhelpful and actually hindering growth, as any debt ceiling deal involves cutting spending, which is stimulatory.
The expert went on to highlight another aspect of the matter — that it makes Congress recommit to paying what it is already obliged to pay — and compared it with a group of people skipping out on the bill after eating at a restaurant.
"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. [...] 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," Auerback said.
According to the expert, this is essentially what the House Republicans are threatening to do, which undermines the idea that Washington will always honor its obligations.
Debt of Discord
The current crisis comes in the wake of an exhausting intra-party struggle among the House GOP with McCarthy winning the gavel after making a deal with the Freedom Caucus, a right-wing faction in the House. This puts the newly-elected speaker in a tight spot, as he now has to reach a deal with the White House while also appeasing lawmakers to his right.
"I believe they'll try to get spending restraint in return for voting to increase the debt ceiling, but if they [the Republicans] can't get the former they won't likely vote against the increase and risk a government shutdown," Richard Salsman, the president of research and forecasting firm InterMarket Forecasting, Inc., and a visiting assistant professor of political economy at Duke University, told Sputnik.
Tymoigne also suggested that McCarty will give up at the last minute, or his party will get the blame and be punished at the ballot box.
At the same time, Auerback warned that playing nice with Democrats will earn McCarthy the ire of the more ideological lawmakers, which could create problems down the line.
"The problem is that the new Speaker, Kevin McCarthy, could well lose his job if he agrees to a deal with the opposition Democrats, as the radical fringe of the Republicans will try to vote him out of office. So the upshot could be both economic and political chaos," Auerback said.
Looming Default?
While there is still time to hash out a deal to raise the debt ceiling if no such arrangement emerges by June, the country will face a risk of default that would reverberate across the world.
"If the US defaults, that would disturb financial markets because US treasuries are used as the proxy of the risk-free security to price other securities. This crisis would be irresponsible given that it is completely preventable (raise the debt limit or remove it or mint the coin). It is like complaining you fell because your shoes are tied together and you refused to untie them," Tymoigne explained.
Salsman, for his part, suggested that while a debt default would be a bad thing, it is not necessary, since "incoming tax revenues can always be (and should be) prioritized to debt service, relative to income redistribution schemes."