If you follow news, which you should, you’ve probably heard about the debt ceiling fight in Congress.
Simply described, the federal government spends more than it takes in, and borrows the difference. But Congress, beginning in 1939, has capped the amount the Treasury can borrow, although it regularly raises this limit.
But in recent years, Republicans have sought to condition these raises on budget or policy concessions. That leads to political fights. That’s what’s happening now.
What’s immediately at stake is whether the Treasury can borrow for spending already approved by Congress. The ceiling has already been reached, so Treasury can’t borrow anymore, but a lot of taxes are paid in April, which will cover the government’s bills through sometime between June and August.
If Congress hasn’t raised the debt ceiling by then, the government won’t have to completely stop spending, but won’t be able to pay all its expenses. It’ll be the equivalent of a household choosing between paying the rent or car payment. The decision on which bills won’t be paid will be made by Biden administration officials. If they don’t pay interest on government debt, that probably will crash the stock market, push the U.S. economy into recession, and reverberate through the global financial system.
All of this is background. A lot of political rhetoric is flying back and forth, which I won’t describe in detail; I just want to help readers past the b.s., which is the purpose of this posting.
(1) “Our children and grandchildren will have to pay this debt.” Not true. The government can refinance (“roll over”) its debt forever, as long as there are buyers for Treasury bonds, which until now have been the world’s safest securities. But that’s because the Treasury has never defaulted, and the world’s trust in those bonds — even China buys them — will be impaired if the Treasury is unable to pay interest to bondholders. That will force the government to pay higher interest. If Republicans intend to reduce spending, a Treasury default will have the opposite effect.
(2) “Deficits don’t matter.” You sometimes hear this from Democrats, but that’s not true either. Other things being equal, higher debt requires the government to spend more on interest. More importantly, government borrowing competes with private borrowers for the available funds (see article here), so increased government borrowing sucks money out of the private economy, resulting in slower economic growth.
(3) “Government debt is bad.” Basically wrong. While debt interest is an expense that sucks up tax dollars, Treasury bonds are very useful to the financial system. Some institutions are required by law, or regulators, to invest funds in safe places like Treasury bonds: Banks, insurance companies, pension funds, etc.; and there are many others who, although not required to do so, want to own Treasuries as part of an investment strategy.
This means there needs to be an adequate supply of Treasury bonds available for purchase if the financial system is to function smoothly. Reducing government debt, or not letting it grow as fast as the demand for Treasury bonds, would have negative knock-on effects in the economy. This is counterintuitive, but arbitrarily limiting government debt issuance can be harmful.
(4) It’s all politics. There’s no enlightened discussion going on about the economic effects of deficits and the debt. Republicans are only talking about their political demands, which are based on anti-government ideology, not practical economics. There’s no economic need to force the government to stop borrowing. The debt ceiling is being used as leverage by Republicans to force Democrats to accept policy changes. The Democrats aren’t wholly innocent; their spending wishes are based on what their voters want, and while much of this is defensible, they ignore economic considerations and focus on political goals, too. Now, both sides are playing a game of chicken; the question is who will blink first. If neither does, a Treasury default could happen by accident.
Now let’s talk about the politics behind this:
(5) Republicans added to deficits. All recent GOP presidents have sought to cut taxes on the wealthiest Americans. That reduces the government’s income, which increases deficits and adds to debt. And if you study budgets, Republicans spend as much as Democrats. They’re merely using the debt as an excuse to cut spending they don’t like (e.g., on things like health care, food stamps, the IRS, cracking down on polluters, etc.).
(6) This isn’t really about reducing deficits. If it was, they wouldn’t be pushing to eliminate Biden’s $8 billion-a-year increase in the IRS budget aimed at enforcement against wealthy tax cheaters. Doing that will reduce tax collections and increase deficits. It’s really about the GOP’s political priorities, which include shielding the wealthy from paying the taxes they owe.
(7) The Republican demands are drastic and unrealistic. They propose to limit spending growth to 1% a year for 10 years. That’s an arbitrary number, not a figure rationally tied to public needs. It doesn’t account for inflation and population growth. By exempting the military, which is a major part of the budget, very large spending cuts would fall on the rest of government (see story here). It’s actually a drastic downsizing of the non-military functions of government, which is a political goal, not an economic necessity.
All in all, this drastic and arbitrary capping of spending is merely a backhanded way to slash popular programs that Republicans have targeted for many years. They couldn’t campaign on this and get elected, so they disguise it with fake fiscal crisis rhetoric. Democrats shouldn’t go along with it. Neither should voters.
Related article: Reuters dissects the GOP proposal here.