The Dangerous Game of Debt Ceiling Chicken
Let's hold America's creditworthiness hostage!
America has a spending problem. Anyone who thinks otherwise is willfully blind. But Republicans forcing the country into a dangerous game of debt ceiling chicken is a reckless way of trying to remedy it.
Now is not the time to fix what will eventually be (and in many ways already is) crippling debt. With America’s creditworthiness and financial market stability at stake, the priority should be avoiding default, not scoring political points.
Why wasn’t this a problem during the Trump years? The debt ceiling was raised for each of the four years of his administration with almost no objection. The same goes for the Bush era. In the past two decades, only Obama and Biden have had to face the reality of America potentially defaulting on its debt obligations because Republicans want to make a political point.
Spending needs to decrease. America must get its financial health in order if it’s to survive and thrive. While it may seem wise in the short term to use the political leverage of the debt ceiling to make a point, the increased borrowing costs of failing to raise the debt ceiling in time will likely more than counterbalance any spending cuts. Just look at what happened in 2011 (the last time we stood at the edge of the debt ceiling cliff).
“Delays in raising the debt limit in 2011 led to an increase in Treasury’s borrowing costs of about $1.3 billion in fiscal year 2011.” - U.S. Government Accountability Office
The following will give a brief history of the debt ceiling, why it has become so politicized after decades of nonpartisan increases, and why America should do anything to avoid defaulting. Democrats have to come to the table to reduce spending or (prudently) raise taxes. But that time is not now with default staring America in the face.
A brief history of the debt ceiling
America has had a statutorily imposed debt ceiling, also known as a debt limit, since 1917 (see the Second Liberty Bond Act). Prior to 1917, debt was capped by parliamentary procedures that made it difficult to issue more debt.
In fact, the debt ceiling was supposed to make it easier to issue debt and thus avoid the bureaucratic parliamentary process to whip votes for additional debt issuances. As you can imagine, it would be very burdensome for both Congress and the Treasury to obtain approval for each bond issuance.
With that said, the pendulum has swung too far in the opposite direction. Since 1917 the debt ceiling has largely increased to astronomical levels year over year. That’s particularly true in the last two decades.
At the end of the Clinton administration, America had a budget surplus. As of 1999, America had approximately $5.6 billion in debt and its debt-to-GDP ratio was about 58%. Fast forward to 2022, debt has ballooned to ~$30.8 billion and debt-to-GDP is about 123%.
The 123% figure is arguably the most alarming. It means America is issuing more debt than the GDP it produces.
This disastrous balance sheet situation needs to be addressed and corrected. Instead of addressing the problem through other means, Republicans have chosen to use their newfound majority leverage over debt ceiling. In effect, they want to hold America’s creditworthiness hostage out of hopes of extracting concessions from Democrats, which is a dangerous game of chicken with potentially disastrous consequences for America and the world economy.
Why did the debt ceiling debate become so politicized?
It never used to be this way. The 1995 Congress led by Newt Gingrich changed everything. Prior to 1995, the debt ceiling was generally increased whenever a new budget was passed. This parliamentary rule was removed by the 1995 Republican Congress.
Republicans at the time were intent on reducing the size of the federal government. It was the first real debt ceiling debate, which led to a government shutdown and almost caused the U.S. to default. Eventually, however, the debt ceiling was increased and the government shutdown was resolved.
Interestingly, however, there were no major debt ceiling debates during the Bush years of the 2000s. Despite the fact America had entered multiple wars and spending aggressively, Republicans didn’t raise major objections to increasing the debt ceiling. But that changed in 2011 when the Obama administration was in office, and Republicans once again had a majority in the House of Representatives.
The debt ceiling debate in 2011 was the closest America has come to defaulting on its debt. The Republican delay in approving the debt ceiling’s increase led to the downgrade of America’s credit rating. The stock market had one of its worst days in history. And in addition, the extra borrowing costs for the delay were projected in the billions.
All because Republicans decided to debate the issue of America’s spending when considering whether to increase the debt ceiling.
These objections, however, never surfaced while a Republican president was in office. Donald Trump added about $8 trillion to the existing national debt. Yet Republicans approved increases to the debt ceiling each of the four years he was in office.
The reason the debt ceiling has become so politicized for Republicans is because it has become one of the only times they have leverage over the budgetary process. There are few opportunities to voice objections on budgetary items. Although that’s not a perfect excuse because these matters could still be debated at the appropriations stage.
For Republicans to use this leverage at such a delicate point as debt ceiling approval, it’s not only reckless, it’s anti-American.
The dangers of defaulting
As of this past week, the U.S. Treasury has had to implement extraordinary accounting measures to pay America’s existing bills. As a reminder, the debt ceiling debate is not about new spending. It’s about existing obligations that America has already agreed to pay.
Whether that’s interest on U.S. Treasuries held by sovereign, institutional, or retail investors, or social security and other entitlement benefits, refusing to raise the debt ceiling puts all of these existing obligations at risk.
As what happened in 2011, America’s credit rating could be downgraded again. The stock and bond markets could become extremely volatile. Borrowing costs could soar for the next decade. Not just for the federal government, but for all Americans. It’s already hard enough for many young people to buy homes.
So this game of debt ceiling chicken instigated by Republicans is potentially disastrous for America and the world at large. In an interconnected economic world, everyone is at risk if the main capitalist nerve center defaults on its most basic financial obligations.
Now is not the time to debate new spending
As I said at the outset, America has a spending problem. I’ve never liked how much we’ve spent as a country, especially in the last two decades. But Republicans cannot claim they’re fiscally conservative given the rampant spending that took place during the Trump years, even before the pandemic.
The Trump tax cuts alone significantly reduced the U.S. Treasury’s revenue, while largely benefiting billionaires and corporations. No austerity measures were put in place. Trump wanted to build his wall, after all. Republicans turned a blind eye.
Now Republicans want you to think they’ve always been fiscally conservative. Representatives from the Freedom Caucus like Andy Biggs are on the warpath to either cut spending - which primarily means social security and medicare - or send America into default. Don’t take my word for it, read his tweet that I highlighted in this video:
https://www.tiktok.com/@logan_stone21/video/7190374593402572075?lang=en
While I understand why Republicans want to use the leverage of the situation to score political points, holding America’s creditworthiness and overall market stability hostage is not the way to do it. The risks are too extreme. But extreme views have never been an issue for this current breed of Republicans.
Kevin McCarthy will either have to force Democrats to agree to cut spending in exchange for raising the debt ceiling, or he will be kicked out as Speaker of the House. It’s as simple as that. After what we witnessed in his 15 attempts to be voted in as Speaker, it’s clear who is in charge of the Republican Party.
It’s not McCarthy. It’s not Trump. It’s the Freedom Caucus.
Democrats need to come to the table, but not now
Negotiating with modern-day Republicans is like negotiating with terrorists. If you give concessions while they hold something important hostage (like U.S. creditworthiness), they won’t stop there. They will keep trying to extract further concessions until they’ve taken full advantage and left you for dead.
If the Democrats set the precedent now of caving to Republican demands over the debt ceiling, Republicans will be incentivized to tear apart every political norm possible so long as it benefits them. They learned it from the master. Donald Trump.
What the Democrats can do is agree to come to the table after the debt ceiling has been raised and financial calamity has been averted. They can detail exactly when they will meet, what will be discussed, and how the budget will be addressed to cut spending.
It’s in everyone’s interest for America to have a strong balance sheet. America cannot effectively counter attacks on civil liberties, geopolitical threats, and emotion-fueled populist uprisings unless it is in a strong financial position. Or as Jamie Dimon calls it, a fortress balance sheet.
America is simply able to do more both internationally and domestically when the house finances are in order. Nobody could run a company or household the way America runs itself. The CEO would be fired. The marriage would end in divorce.
But we cannot fix America’s spending by holding it hostage. Republicans cannot force Democrats to engage in debt ceiling chicken, with the potential (serious) risk of falling off the default cliff and destroying everybody. Although I guess they think they can and should.
Republicans like Andy Biggs want you to think that this is a Democratic problem. That Democrats need to lay in the spending bed they’ve made. But he’s completely wrong.
America’s spending is every American’s problem. But sending America into default wouldn’t force only Democrats into the proverbial bed of financial destruction.
It would force all of us there.
Elsewhere…
The World Inequality Forum. The World Economic Forum took place this past week. Global elites, from billionaires and CEOs to celebrities and government officials, flocked to… read more here
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