Debt Ceiling Drama

Debt drama

The United States Treasury is responsible to manage the finances of the federal government, it issues and manages government debt. When the federal government spends more than its revenues, the Treasury has to increase government debt. US debt has increased under every president since Herbert Hoover (1929-1933). The government deficit (the shortfall between revenues and expenditures) reached $1.38 trillion in fiscal 2022 (about 4% of GDP) and continues into 2023.

Since 1917, Congress has instituted the obligation to approve a ceiling for the total value of debt issued by the government and for nearly 100 years, Congress approved increases in the debt ceiling pretty much automatically, following the logic that government expenditures were principally the consequence of programs already approved by Congress. Since 1960, according to the Treasury, Congress has approved a change in the debt limit 78 times, 49 under Republican and 29 times under Democratic Administrations.

However, in 2011 during the Obama Administration, when they won a majority in Congress, Republicans in Congress under the influence of the Tea Party movement refused to approve an increase in the debt ceiling, insisting that any increase in debt should be combined with a reduction in expenditures. In spite of months of negotiations between then Vice-President Biden and Congressional Republicans, they were never able to reach agreement, pushing the US to the brink of a default on its debt. Many economists point out that US Government debt is the bedrock of international debt markets, and a default by the US would cause a major international financial crisis with probable devastating impact on the US and the world.

In 2011, the Obama Administration reached a last-minute agreement with more moderate Republicans, putting into place a series of complicated procedures which eventually led to a substantial reduction in virtually all government discretionary spending over subsequent years, arbitrarily reducing many programs critical to US long-term growth and progress. The confusion and risk of default in 2011 also led Standard & Poor, one of the leading agencies that rates the quality of debt, to downgrade the rating of the US Government from the highest “AAA” to one notch below, “AA+”. Estimates have been made that the debt crisis of 2011 led to significant increase in costs to the US Government.

On January 19, 2023 Treasury Secretary Janet Yellen informed Congress that the US Government had reached its debt ceiling of $31.4 trillion (about 123.6% of GDP), urging them to immediately increase the debt ceiling, that she was putting into place “extraordinary measures” which could postpone the deadline date when the government would be pushed into default, the first time in the history of the country, which she estimated in June, 2023 (others have suggested the date might be pushed back to July or August, 2023).

Here we are in 2023 with a repeat of virtually the same scenario as in 2011 when the US went to the brink of a default, a Republican controlled House of Representatives and a small group of right-wing Representatives who insist they will not approve an increase in the debt ceiling without comparable reduction in expenditures. Only the situation is much more dangerous than in 2011: only 6 Republican members of the House can block a debt ceiling agreement, and Republican Speaker Kevin McCarthy has, in order to secure the votes to get elected Speaker, agreed to give enormous power to his extreme right wing, specifically agreeing to support their effort to tie any increase in the debt ceiling to a reduction in expenditures. Biden has made it clear he is not willing to negotiate a reduction in previously approved programs, and given his experience of failed negotiations in 2011, he has to date not even agreed to open discussions with House Republicans on the subject. We are again facing a high stakes game of “chicken”, both Republicans in the House and the Biden Administration unwilling to budge.

What is likely to happen? One possible solution would be for moderate Republicans to agree to cooperate with Democrats in the House and put into place a “discharge motion” by which a majority (all the Democrats plus at least 6 Republicans) in the House can force a floor vote even if the Speaker doesn’t want it. The risk of course for moderate Republican House members is that ex-President Trump, Speaker McCarthy and the Republican Party leadership turn against them, making it difficult for them to win the Republican primaries leading to the election of November 2024. Few Republicans have been willing to stand up against the current Republican Party leadership, it is probably overly optimistic to believe they will do so now.

A more likely result is that as the deadline date approaches, with increasing pressure from all sides, the Biden Administration will have to negotiate spending cuts, seeking to minimize the impact on the programs they care most about such as Social Security, Medicare and other social and health expenditures and also seeking, probably with no chance of success, to get Republicans to agree to tax increases on the wealthy. The result is likely to be an agreement probably to once again reduce discretionary spending, hitting many critical areas of the operations of government, without seriously addressing the long-term causes of growing federal debt.

Whatever the outcome, both Parties will make every effort to place the blame on the other side, Republicans seeking to show that Democrats are wasteful spenders and Democrats accusing Republicans of seeking to cut back programs that are popular with a majority of Americans.

And so the subject of Debt Ceiling will stay in the news for the next months, making financial markets tremble while we observe with dismay that the absurd dance of two polarized Parties continues!



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