To be clear, a debt-ceiling increase does not authorize new spending; it just raises the arbitrary cap on how much the government can borrow to pay off bills that it has already committed to. Given that Congress spends more than it collects in revenue, it must allow Treasury to borrow money to make up the difference. If Treasury can’t borrow, on the other hand, lots of bad stuff happens.
Among the most immediate bad stuff: Uncle Sam would have trouble paying military and civilian salaries, Social Security benefits, government contractors, domestic and international creditors, and almost every other bill already racked up.
If we default on these IOUs, even briefly, that does not only hurt those denied their promised payments. Default would also make it more expensive for the government to borrow going forward. Right now, the United States can borrow on the cheap because creditors do not question whether they’ll be paid in full and on time. A default would reveal us to be untrustworthy borrowers, and creditors would demand higher interest rates.
So, not exactly great for reducing our future debt burden.
Even worse, a U.S. default could trigger a worldwide financial crisis. That’s because financial markets currently treat U.S. debt as the safest of assets, with all other assets around the world benchmarked against us. Our default would send waves of financial panic cascading through lots of other markets, too.
There’s also the pesky matter of whether failing to raise the debt ceiling would violate the Constitution, which states that the “validity of the public debt of the United States … shall not be questioned.”
All of which is to say that raising the debt ceiling should be a no-brainer. And it often is — just not, apparently, when a Democrat is president.
During the Obama presidency, Republicans repeatedly held the debt limit hostage. The 2011 debt-limit showdown led the credit rating agency Standard & Poor’s to downgrade the country’s perfect credit rating for the first time, saying that “political brinkmanship” over paying our bills revealed U.S. governance and finances to be “less stable, less effective and less predictable” than previously believed.
Now that President Biden is in office, and with a debt-ceiling deadline looming this weekend, opportunistic Republicans appear to be attempting the same feat.
This all follows another credit rating agency, Fitch, recently warning that it might also downgrade its rating of U.S. debt due to a “deterioration in governance.”
Democrats, understandably, are furious.
Lifting the debt ceiling is necessary to pay bills racked up during the Trump years, including the nearly $5 trillion of new debt signed into law through tax cuts and spending increases even before covid-19 struck. Covid then added trillions more in red ink, primarily through bipartisan relief plans passed last year under Trump.
None of that apparently matters to Republicans.
The statutory debt limit kicks in Aug. 1, after which point Treasury will take additional “extraordinary measures” so the government can continue paying its bills. Exactly how long these bookkeeping gymnastics can stave off default is unclear, because covid and its economic effects have introduced more uncertainty into the timing of tax collections and spending obligations. The Congressional Budget Office forecasts that the government would be unable to make its usual payments around October or November; Treasury Secretary Janet Yellen warned this could happen shortly after lawmakers return from their August recess.
This time around, at least, Democrats might be able to avoid another last-minute hostage crisis; because Congress is still crafting its next budget resolution, lawmakers can raise the debt limit through the reconciliation process — i.e., with only Democratic votes, which isn’t always possible. Some Republicans, including McConnell, are even urging them to do so.
This solution may deprive Republicans of the financial catastrophe they seem to crave, but they can still take advantage. Already, Republicans have (falsely) portrayed any Democratic vote to raise the debt limit as a decision to unilaterally add trillions to the debt. Even though, once again, this is about paying off old bills — not creating new ones.
Per usual, it’s left to Democrats alone to do the right thing. And somehow they’ll still get punished in the process.