In his bid to become Speaker of the US House of Representatives, Kevin McCarthy apparently agreed to a demand, voiced by Representative Ralph Norman of South Carolina, that he commit to “shut down the government rather than raise the debt ceiling.” There is firm bipartisan agreement on what this would mean. Crisis looms. For the Republican extremists, the impending crisis is their chance to remake America. For Democrats (and a few surviving mainstream Republicans), the threat of catastrophe justifies a politically dangerous vote to raise the ceiling. For the media – left, right, and center – it’s the drama, stupid.
What is the crisis? Paul Van de Water of the Center on Budget and Policy Priorities puts it this way: “If the government couldn’t borrow, it would need to impose sharp, massive reductions in spending, which would have devastating economy-wide consequences. Some households, businesses, and nonprofits would be unable to pay their bills while they waited for payments the government legally owed them. Cuts in grants-in-aid would strain the budgets of state and local governments. Such a large drop in spending would plunge the nation into recession and drive up unemployment. ... Moreover, the government’s inability to pay all its bills would shake financial markets around the world. It would raise serious doubts about the nation’s creditworthiness, sap the confidence of lenders, call into question the dollar’s place as a reserve currency, and increase federal borrowing costs.” Van de Water is nonpartisan. He would prefer that Congress repeal the debt ceiling entirely. Failing that, he urges a clean vote to increase it. I agree with him, but neither will happen. That said, his arguments do need to be challenged on their merits. It’s time to drop the hype and look at the facts.
First, a failure to raise the debt ceiling does not override any legal obligation to spend. True, the debt ceiling is written into law. But so are Social Security, Medicare, Medicaid, interest payments, and every other mandated or appropriated form of spending. The US Treasury must follow the law. Debt ceiling or no, it cannot legally default on any obligation.
Second, the Treasury has no legal authority to single out Social Security or interest payments or anything else for cuts, and – so far as I know – it couldn’t stop those payments if it wanted to. The Treasury makes millions of payments every day. The last time I checked (during Barack Obama’s presidency) the software needed to stop them had never been authorised and did not exist. So far as I know, it still does not exist. Why would it? Social Security has never once missed a payment.
Third, if the Treasury somehow did delay paying some bills, most businesses, governments, and households would just carry on – knowing perfectly well that the cutoff would be short-lived. If necessary, most could borrow for the short term – that’s what banks and credit cards are for. Life would not end, and in most cases, it would barely slow down.
Fourth, the Treasury does not need to issue debt to spend. Like all governments, it spends by writing checks. It does not raise the money first by issuing bonds. Rather, it issues bonds to provide private investors with a safe interest-bearing asset in exchange for the cash it just created by writing checks. If it decides to stop issuing bonds (because of the debt ceiling), that’s a problem for private investors, not for the government, despite what top government officials may say.
Nor would there be a global financial crisis even if the Treasury did manage to stop paying interest on federal debt. The debt would still exist; the interest would still accrue. Anyone who wanted to trade debt for cash could do so on the open market. With no new debt being issued, the price of old debt (“defaulted” or not) might rise, bringing interest rates down (as happened during the 2011 “debt ceiling crisis” despite a downgrade from Standard & Poor’s). Why? Because everyone would know that they would be paid up soon enough. Yes, the stock market might take another dive. So what? It’s been doing that for months already.
Finally, here’s a real magic trick. Treasury Secretary Janet L. Yellen is fully empowered to issue a platinum coin in any denomination that she decides. The law granting this authority was enacted in 1997 by a Republican Congress. Yellen can order the US Mint to issue a trillion-dollar coin, with which the Treasury can buy back a trillion dollars of Treasury debt held at the Federal Reserve. Since a coin is not debt, the debt would fall below the ceiling with the stroke of a bookkeeper’s pen. There would be no economic consequences; the world outside the Federal Reserve and Treasury would be unaffected. Whose face should appear on the coin? McCarthy’s comes to mind.
In short, the debt ceiling imbroglio is not a crisis, but a farce. The farce has been performed repeatedly ever since the law was enacted back in 1917, as the US was entering World War I and running up public debt. But farce can lead to tragedy. If Democrats are trapped by their own fear-mongering, they may fold to the nihilists’ demands to enact spending cuts in exchange for an increase of the debt ceiling. This has happened before. As journalist Ryan Grim reminds us: “The last time Republicans won a debt-ceiling standoff, Biden was vice president, and the Obama administration agreed to the so-called sequester. They also agreed to create the Biden Committee, which tried to land a Grand Bargain with then-Rep. Eric Cantor. A Grand Bargain was a Washington fever dream for years, and would include some combination of tax increases and cuts to Social Security, Medicare, and other social spending, and the idea is that it will be massively unpopular but if the parties do it together then voters have nobody to take it out on.”
We are getting set to avert a fake crisis by creating a real one – for retirees, for the sick, for law enforcement, for the economy, and (of course) for all those hated regulatory agencies that haven’t yet been destroyed. That danger is real. The debt ceiling? It’s just a ruse and a trap. Copyright: Project Syndicate, 2023
James K. Galbraith, Chair in Government/Business Relations at the Lyndon B. Johnson School of Public Affairs at the University of Texas at Austin, is a former executive director of the congressional Joint Economic Committee.
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