Some have labelled it “debt roulette,” but the routine congressional clash over extending the federal debt limit might be better described as a game of chicken. Picture a pair of old buses carrying the leaders of the two major parties, hurtling at each other on a disastrous collision course, while the rest of us can only stand at the side of the road and sweat it out.
In the latest iteration of this long-running drama – the current deadline for settling the matter is December 3 – Democrats aim to lift the debt ceiling so as to cover the costs of spending already approved by Congress. Republicans say they’ll play no part in raising the limit, looking instead to force Congress’s ruling party to resolve the budget problem by making cuts in the Democratic spending plan.
Kathleen Day, a business journalist and author and a lecturer on the full-time faculty of the Johns Hopkins Carey Business School, has made a specialty of studying and writing about the nation’s financial workings, particularly in times of crisis. In the following Q&A, Day offers her insights into the debt limit issue and its history. She addresses topics that include the origins of the limit, the impact on the economy if the U.S. were ever to default on its debt, and the legacies of Hamilton and Jefferson within the context of this issue.
QUESTION: The U.S. government has carried debt since the Revolutionary War, but the U.S. debt limit is a creation of the 20th Century. How and why did it come about?
KATHLEEN DAY: Until World War I, Congress approved not only spending but essentially any instance of the U.S. Treasury’s issuing debt to finance that spending. In 1917, Congress changed that by lifting the requirement that it approve every bond Treasury issued to fund the war. But it did set limits on the amount Treasury could issue, and in that way retained control over the process. Then, at the end of the 1930s, Congress lifted the requirements that it had to approve Treasury’s issuance of debt to fund other spending that Congress had already approved. It again set a limit – a ceiling – on overall debt to maintain control. That’s the system now in place.
Key to remember is that the debt ceiling is a cap on debt to be issued for spending that Congress already has approved, including, for example, money for Social Security and Medicare payments and Veteran retirement funds. Approving an increase in the debt ceiling does not mean approving new spending. It merely enables the Treasury Secretary of the United States to fund debts that Congress has already approved and incurred.
If the debt limit were not raised and the government were to default on its financial obligations, what would be the impact on the U.S. economy?
It would be a disaster, as U.S. debt securities, despite all our bickering, remain the benchmark of financial security the world over. If we were to default, that underpinning would be lost, and markets would plunge and economies here and abroad would suffer. The cost to taxpayers to fund future expenditures would skyrocket. Unemployment would jump: Moody’s, for example, recently estimated that 6 million jobs would be lost, nearly doubling the current unemployment rate of 5.2 percent and erasing $15 trillion in household wealth, if default occurred.
Retirement checks for veterans and Social Security recipients would be interrupted. The cost to borrow for homes, cars, and credit cards would explode. In short, default would cause mayhem – so much mayhem, in fact, that I think elected officials would blink before they would let it happen.
Still, Congress’s let’s-take-us-to-the-brink-before-we-blink tactics have potential costs. In 2011, during the Great Recession, just after Republicans and Democrats reached a debt ceiling agreement, Standard & Poor’s nonetheless downgraded the U.S. credit rating, citing the “political brinkmanship” as an element of risk that could not be ignored. That downgrade provides a window onto how such a move comes at taxpayer expense. For taxpayers, political uncertainty can raise the cost of borrowing as investors demand higher returns to compensate for the higher risk of default uncertainty.
Another key ratings agency, Fitch, in a recent report, cited the bitter political division that followed the 2020 presidential election as a troubling circumstance that could lead it to downgrade America’s credit rating, and thus raise borrowing costs for taxpayers, with or without a debt ceiling. In other words, the stability of America’s democratic institutions has an even greater impact than the debt ceiling on the country’s ability to borrow and maintain its good name in markets.
In a recent interview with Marketplace, you referred to the “political football-ness” of debt. What did you mean?
With or without a debt ceiling, politicians of both major parties will find a way to make funding American’s debt political. For example, the Republican tax cuts of 2017 raised the deficit – the amount by which expenditures exceed taxes and other sources of funding and thus create the need for the government to borrow – by an estimated $1 trillion over the next decade, despite promises that the cuts would pay for themselves. The deficit grew by nearly $8 trillion under Donald Trump, even before COVID-19 hit. Republicans then used the increase in the deficit that their tax cuts helped create to call for cuts in spending, specifically in Social Security and Medicare.
They didn’t expect the pandemic to come along, however, and with it a recession. When COVID-19 hit and sparked a downturn, it scuttled talk of cutting Social Security and Medicare and, to the contrary, required massive additional government spending to keep the economy afloat. The total deficit was $2.8 trillion in fiscal 2021, its second-highest total ever and largely driven by spending to counteract the economic drag of COVID-19. That pushed up the already-big national debt even more. It’s now bigger than ever – over $28 trillion – and the debt ceiling has been hit.