Congress sets limits on total federal borrowing to keep the government’s budget under control. Does anybody think it’s working?
In 1939, when Congress first established the debt limit as we practice it today, total federal debt was 52% of GDP—and that was at the end of the Great Depression, after a massive boost in fiscal stimulus programs.
Today, the federal debt is 124% of GDP, or more than $31 trillion. Despite the current standoff over raising the debt ceiling, the federal debt as a percentage of GDP is bound to go even higher. However it happens, Congress will raise the borrowing limit again, and again, and again after that, because there is no practical alternative. Refusing to do so would cause draconian damage to the US and world economy and widespread hardship. For all the tough talk about out-of-control debt, only a few nutty few politicians want to take the blame for mass unemployment and wrecked family budgets.
The borrowing limit served a purpose in the past, before a revolution in credit allowed everybody to live beyond their means. In simpler times, Congress approved federal borrowing on a project-by-project basis. Then it enacted an aggregate borrowing limit, so the legislature didn’t have to approve every issuance of Treasury debt one-by-one. Congress raised the borrowing limit as needed, without much drama until 2011. That’s when a battle over cutting the national debt took the Treasury within hours of defaulting on payments before Congress allowed more borrowing.
Financial markets quaked and the S&P 500 lost 15% of its value in a month.
Since 2011, the debt limit has become counterproductive. Instead of regulating deficits, it triggers instability, by creating the specter of a US default where there would otherwise be none.
“The debt ceiling does not serve any useful purpose,” Louise Sheiner of the Brookings Institution said in Congressional testimony last year. “It has not imposed any fiscal discipline on Congress. Bickering over the debt ceiling is a waste of time and energy, creates unnecessary uncertainty, threatens the benefits of issuing the world’s safest asset and undermines public confidence in our political institutions.”
Both political parties abuse the debt limit by imposing new policies, when they’re in power, that make more borrowing necessary. Republican tax cuts in 2001, 2003 and 2017 cut federal tax revenue by several trillion dollars, without any corresponding spending cuts.
During the 2009 recession, President Obama signed a big stimulus bill funded, as stimulus bills usually are, by borrowing. In 2020, President Trump signed several Covid-related stimulus bills. In 2021, Biden signed another $2 trillion stimulus bill, even though the Covid recession was over by then. In each of these instances, Congress piled on debt and literally guaranteed the borrowing limit would need to be raised.
Yet Republicans who control the House of Representatives now balk at raising the limit, unless there are deep spending cuts that would eviscerate health, safety and educational programs and harm millions of their own constituents. Democrats who control the Senate will never approve the House Republicans’ plan, and House Republicans know it. This is the pointless messaging battle Republicans, inexplicably, think will be a big political win for them.
The Treasury Dept. hit the formal borrowing limit in January, and has since been shifting money around to keep paying federal contractors, government employees, Social Security recipients and everybody else who gets a government check. Treasury Secretary Janet Yellen says the government will run out of money for real in early June if it can’t borrow more.
So it’s showdown time.
President Biden will now start negotiating with Republicans, led by House Speaker Kevin McCarthy, on some kind of deal to raise the borrowing limit while providing Republicans concessions they can point to as proof they care about deficits—even though they repeatedly cut taxes with no regard for deficits.
It’s worth pointing out: There doesn’t need to be any deal. Congress could just raise the borrowing limit, without any drama, as it has done dozens of times before. That’s what it should do, since virtually every member of Congress has voted for a tax cut or spending hike that created the need for more borrowing in the first place.
Since the debt ceiling has become an absurd, self-imposed problem, there are some absurd solutions, such as the $1 trillion coin. Technically, the the US mint is allowed to issue platinum coins in any denomination the Treasury wants. So, in theory, the government could just give itself more money, no borrowing needed. There might be problems, but it would be satisfying to see Janet Yellen defang the phony deficit hawks with a wave of a magic wand.
If Congress doesn’t raise the debt limit, the Biden Treasury Dept. can also just start issuing more debt, as if Congress doesn’t matter. It might be violating the law, but it might not be. The 14th Amendment, ratified in 1868, says “the validity of the debt of the United States … shall not be questioned.” The debt ceiling law didn’t come until 71 years later. Some legal experts think Congress would be engaging in unconstitutional behavior by failing to raise a borrowing limit it imposed on itself, which would make the whole law unconstitutional. What a treat it would be watching moneyed interests bidding for Supreme Court votes, both pro and con.
Congress could pre-empt a legal challenge to the borrowing limit by simply repealing it. The Treasury would borrow whatever it needed, with no limits, to spend the money Congress tells it to— and Congress would keep approving deficit spending and unfunded tax cuts without the hypocrisy of pretending to care. Markets, not politicians, will ultimately determine when the federal debt has gotten too large, and force a solution, whether there’s a borrowing limit or not.
By Rick Newman / Yahoo Finance