The U.S. economy is again being held hostage to our ridiculous federal debt ceiling

Rep. Kevin McCarthy (R-Bakersfield) gave away much of his leverage to right-wing Republican House members to turn into speaker. Can he keep them from crashing the economy? (Associated Press)

The individuals in command of U.S. fiscal policy are sometimes considered amongst probably the most sober people on this planet, so you might be wondering why we’re suddenly hearing ideas resembling the minting of a trillion-dollar platinum coin or selling $100 face-value Treasury bonds for $200.

Sadly, the reply is straightforward: Infantile poseurs within the House Republican majority are threatening to dam a rise within the federal debt ceiling. Again.

Republican brinkmanship over the debt ceiling has turn into almost an annual affair. It recurrently causes shudders within the financial markets and warnings that frightening a federal default on Treasury securities — presumably the final word consequence of a long-term standoff — could have dire effects for Americans in all walks of life and for global economic stability.

The rabble-rousing Republicans who prolonged the House leadership election have made clear that a ‘clean’ debt-ceiling increase — wherein lifting the borrowing limit is just not coupled with other measures — mustn’t even be on the table.

Michael Strain, American Enterprise Institute

Congressional Democrats have had many opportunities to remove this weapon from the arsenal of ignorant pyromaniacs within the Republican Party, most recently throughout the lame duck session in late 2022 after they controlled each houses of Congress and the White House. Inexplicably, they did not achieve this, and here we’re.

On Friday, Treasury Secretary Janet L. Yellen warned House Speaker Kevin McCarthy (R-Bakersfield), in addition to the opposite congressional leaders and key committee chairs, that the U.S. debt would reach the statutory limit Thursday, months sooner than had been expected.

At that time, Yellen said, the Treasury would start taking “certain extraordinary measures” to stave off a default. These include suspending scheduled payments into government worker pension funds.

Yellen said that after the political impasse ends, the funds can be made whole. That might not be really easy, nevertheless.

Because of this of a three-month standoff in 2003, one federal retirement fund permanently lost $1 billion in interest since it needed to sell government securities before they matured as a way to meet obligations to retirees.

Before delving further into the implications of a debt ceiling standoff and the possible counteractions, let’s once more review what the thing is.

The debt ceiling is a federal law that sets a limit on how much debt the Treasury can sell. At this moment, the limit is $31.381 trillion, which was set by Congress in December 2021.

Obviously, what Congress decrees, Congress can undecree. The debt ceiling has been raised by congressional votes greater than 91 times since 1960, generally without discussion, by Democratic and Republican majorities and under Democratic and Republican presidents.

After Republicans took majority control of the House of Representatives in 2011, the debt ceiling became the raw material for political posturing. Typically, the GOP describes raising the debt ceiling as tantamount to encouraging profligate spending.

That is the case now, when members of the House Republican majority, who’ve threatened to dam a rise within the debt ceiling unless it’s paired with spending cuts, are carrying on as if blocking a rise within the ceiling is identical thing as halting the expansion of the federal budget.

confidence

Consumer confidence, together with many other economic metrics, crashed in early 2011 as an impasse over the debt ceiling hardened, ending only in August. The consequences lasted well into 2012. The sunshine red line tracks the Consumer Sentiment index of the University of Michigan, and the dark red line the Consumer Confidence index of the pro-business Conference Board.

That is false. It has all the time been false. The politicians making these statements understand it’s false, which makes them liars.

The debt ceiling merely affects how the federal government pays for expenditures that Congress has already authorized. If the politicians didn’t need to spend the cash, all they would wish to do is refuse to appropriate it. They have not done that.

As an alternative, they’re behaving like bank card holders who’ve put more purchases on their cards than they feel like paying for, and thus have decided to stiff the cardboard issuer in the idea that it can reduce their balances.

Why does the U.S. undergo this silly exercise, every nine months on average?

As I’ve explained again and again, the debt ceiling was not originally meant as a limit on the Treasury’s authority to issue federal debt, but quite as a method to give it more latitude to borrow.

The debt ceiling got here into being in 1917 when Congress grew weary of getting to vote on every proposed bond issuance, which it considered a pain within the neck. So it selected as an alternative to present the Treasury blanket authority to drift bonds, subject to a stopgap limitation.

In other words, the limit was never designed to maintain Congress from enacting any spending bills or deficit-building tax breaks it wished. Obviously, it has never had that effect, since Congress routinely approves spending that it knows, by simple arithmetic, would require more borrowing.

Each time the debt ceiling is held for ransom by Republicans (it’s never done by Democrats), some pundits warn that this time the hostage takers could also be serious and others express confidence that it all the time seems that way but everyone knows the standoff will ultimately be resolved, so why worry?

The undercurrent of complacency arises from the notion that the U.S. has never experienced the dire effects of a debt ceiling breach. This concept was most succinctly articulated by Mick Mulvaney, the fiscal battering ram then-President Trump appointed as budget director, who once said of the implications of a default on U.S. government debt: “I even have heard people say that if we don’t do it, it can be the top of the world. I even have yet to fulfill someone who can articulate the negative consequences.”

Yet the negative consequences are and all the time have been evident to anyone who has matured beyond the purpose where they play with their toes.

Then-Treasury Secretary Timothy Geithner did so in January 2011, when he cited sharply higher rates of interest on borrowings by state and native governments, bank cards, home mortgages; erosion of retirement nest eggs and residential values; suspension of payments for military families and civilian government employees, on Social Security, Medicare and veterans advantages; the destruction of worldwide confidence within the dollar and Treasury securities.

“Even a really short-term or limited default would have catastrophic economic consequences that may last for many years,” Geithner told congressional leaders.

Geithner was speaking prematurely of a debt-ceiling impasse that lasted through the summer of 2011 and was finally resolved in August. The economic effects, nevertheless, lasted well into 2012. Consumer confidence fell 22% throughout the standoff and the Standard & Poor’s 500 stock market index, 17%. Household wealth fell by $2.4 trillion, the Treasury calculated.

The impasse was ended by the infamous sequester, which placed harsh spending cuts on the federal government for 10 years. It ought to be recalled that the sequester was devised to be so harsh that it might goad Congress and the White House into reaching a smart budget compromise so it might not be invoked.

No deal happened, so the sequester went into effect, your complete experience resembling the act of staring into the barrel of a loaded shotgun and pulling the trigger to see if it really works. The spending cuts inevitably fell hardest on probably the most vulnerable Americans.

Hundreds of low-income residents of public housing were thrown out of their homes. Tens of hundreds of 3- and 4-year-olds were barred from Head Start, perpetuating the vicious cycle of poverty and poor educational attainment faced by those families. Unemployment advantages were cut by a mean of 15%.

Even conservatives are unnerved by the present level of posturing.

“Raising the debt ceiling merely allows for the borrowing that is required to fulfill the obligations that Congress itself has created,” Michael Strain of the American Enterprise Institute, a business think tank, wrote last week. “The rabble-rousing Republicans who prolonged the House leadership election have made clear that a ‘clean’ debt-ceiling increase — wherein lifting the borrowing limit is just not coupled with other measures — mustn’t even be on the table.”

Strain pointed the finger at McCarthy, who managed to squeak through to the House speakership by giving up any residual character he could have needed to his own incendiary minority.

That brings us to the possible remedies. One recurrent idea is for the Treasury to order a $1-trillion platinum coin from the U.S. mint, deposit it on the Federal Reserve and transfer the worth to its own books, thus making a putative $1-trillion surplus as a cushion against a default.

Legal and financial experts have consistently confirmed that this procedure is legal, though it has been the goal of scoffing from Yellen and President Biden, from back when he was a senator and President Obama’s vp. But their objections seem aimed more at the fundamental gimmickry of the thought, not its legality or fiscal effectiveness.

One other idea is for the Treasury to supply “premium” bonds. The debt ceiling applies to the face value of outstanding debt, but technically nothing prevents the Treasury from issuing, say, bonds with $100 face values but selling them for $200, say by increasing their interest coupons twofold or more.

For buyers, the economic effect can be the identical as buying two $100 bonds and collecting interest at the present rate on each. But from the debt ceiling standpoint, the Treasury would collect $200 but only issue $100 in recent debt.

Buyers might purchase $100 face-value one-year Treasury bills, but as an alternative of being promised 4.66% in interest (the present rate as I write), they’d be promised about 9.32%, for which they might pay $200. But only $100 would go on the Treasury’s books as issued debt.

Republicans have reportedly been working on their very own anti-default scheme, which amounts to ordering the Treasury to “prioritize” spending, say by protecting interest payments on the debt and guaranteeing Social Security and Medicare payments.

But that leaves quite a bit uncovered, resembling Medicaid, school lunches and food safety inspections. Once more, the neediest Americans are within the GOP’s crosshairs.

It’s one thing to decry the proposed remedies as gimmicks, however the debt ceiling itself has been became a gimmick. We have asked before if that is any method to run the world’s leading economy. To ask the query is to reply it. The time has come to stop running fiscal policy as a cabaret act and end the debt ceiling once and for all.

This story originally appeared in Los Angeles Times.

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