Inching Away from Debt Ceiling Calamity
The summer of 2011 in Washington, D.C., was scorching hot. Republicans had taken control of the House of Representatives that January and their No. 1 priority was to rein in spending after the federal debt hit a record. They demanded that the Democratic president work with them to stop the federal government’s “money printing.”
Looks like the summer of 2023 will sizzle with the same kind of heat. House Republicans are again newly in the majority and are determined to reach an agreement with a Democratic president to reduce spending before they vote to raise the federal borrowing limit. Doomsday scenarios abound now as they did then. The predicament, in fact, is very similar, except the record amount of debt is nearly double what it was a dozen years ago, making the situation more dire.
The Congressional Budget Office has warned that the U.S. is in danger of payment default as early as this summer if the debt limit isn't raised. And the debt keeps piling higher. The U.S. is on track to add $19 trillion in new debt over the next decade. Indeed, the circumstances today are different in important ways than in 2011. Back then to avert a default, Congress formed a so-called Super Committee to devise a proposal for an up-or-down vote on a deficit-reduction bill in exchange for raising the debt ceiling. Sequestration – the automatic cutting of federal spending by $2.4 trillion over ten years - was meant to force such a compromise. Most economists and financial market participants cheered the process on.
But it failed. The committee turned out to be not-so-super and presented nothing for a vote. Sequestration was simply waived, eliminating the threat of arbitrary slashes of popular programs.
Today, matters are even worse. The nation faces a generational battle over inflation, which is greatly increasing the cost of government borrowing and the cost of servicing the debt. The Federal Reserve is no longer a helpful partner to fiscal largesse but instead is hitting the brakes as it tries to cool consumer demand. This raises the stakes of annual deficits because the costs grow in unpredictable ways.
Finally, the House Republican majority is much narrower than it was in 2011, shrinking from 20 members in 2011 to only five today. House Speaker Kevin McCarthy (R-Calif.) has pledged to heed the desires of the most fiscally conservative members and has little room to negotiate a compromise. So, the collapse of his majority is a real risk. None of this makes for a good backdrop to another debt ceiling fight.
What to do?
In the short-term, defaulting on the national debt would be disastrous. The most-recent debt-ceiling battle led to a downgrade of U.S. government-issued securities. A default would be even worse. As interest rates and the prospect of a recession rise, a missed coupon payment on U.S. Treasury securities would be catastrophic and set the stage for a global attempt to find alternatives to the U.S. dollar as the main form of currency for international trade.
But two things can be true at the same time. A default would be cataclysmic. But legislating some fiscal responsibility would also be beneficial. Congress has kicked this issue down the road for far too long. As the last twelve years have taught us, making hard choices on federal spending doesn’t get easier with time.
A sensible compromise this time around would be to eliminate the debt ceiling entirely in exchange for fiscal controls. The debt ceiling is of dubious constitutional legitimacy since the U.S. Constitution forbids the federal government from missing any payment of its obligations. The constraint acts neither as a governor on spending nor as a threat that could legitimately be used.
But we can’t stop there. To help with spending, leftover COVID funds should be recouped. Of course, that won’t bend the debt curve and put the budget on a sustainable course. But such small-dollar savings would be a noteworthy, short-term compromise. Long-run solutions will require a lot more political will.
The contours of this kind of a “grand bargain” have been known for a long time. Democrats would allow sensible reforms to entitlement programs while Republicans would permit some tax hikes and cuts to military spending. It’s an understatement to say that Congress lacks the political will to make such a deal absent a crisis. But a crisis is coming. When it does, the quality of life that Americans have grown accustomed to will be threatened. That time is closer than most people think.
Michael Bright is CEO of the Structured Finance Association.
