The government is about to run out of money because of an arbitrary cap on how much it can borrow to make good on bills that it long ago promised to pay.
Lawmakers and the White House are haggling over the conditions under which they will, once again, temporarily raise that cap, known as the debt ceiling. But the better solution would be to abolish it entirely — no strings attached.
The debt ceiling, which has been around in some form for about a century, is sometimes portrayed as a way to impose fiscal discipline upon spendthrift legislators. But that’s nonsense. In practice, Congress has exercised little restraint in its red-ink spillage, regardless of statutory limits. Lawmakers have cut taxes and raised spending, over and over, and later hiked the debt ceiling to allow the government to cover the (lately widening) difference.
Most recently, the government hit the official debt limit on March 1. Since then, the Treasury Department has engaged in “extraordinary measures” to shift money around and continue paying its bills, at least for a little while. Unfortunately, that little while turns out to be even littler than anticipated.
According to Treasury Secretary Steven Mnuchin, the government is running short on cash earlier than expected. Lower-than-forecast corporate tax revenue — thanks to the GOP tax cut that we were promised, honest-to-goodness, pinky-swear, would pay for itself — is partly to blame. Initially Treasury predicted that its extraordinary measures would get us to October, but more recent forecasts suggest we will hit the wall as soon as early September.
Which means the drop-dead deadline before we become global deadbeats could happen while Congress is away on summer vacation.
So what happens if we default on our debt obligations?
Well, for one, it would violate the Constitution, which says the “validity of the public debt of the United States … shall not be questioned.” No small thing.
In more practical terms, though, we’d have trouble paying Social Security benefits, military and civilian employee salaries, and every other IOU we’ve made to creditors, contractors and safety-net beneficiaries. A default also would raise U.S. borrowing costs going forward, which seems to defeat the purpose of a policy supposedly intended to hold down U.S. debt.
And then there’s the risk of, oh you know, a global financial crisis.
U.S. debt instruments are currently considered the safest of safe assets because creditors believe they’ll be paid back on time and in full. Treasurys are the risk-free asset against which virtually all other assets around the world are benchmarked. Calling our creditworthiness into question could therefore set off a chain reaction of global financial panic.
Now, you might think the specter of another U.S.-caused worldwide financial Armageddon might motivate politicians to raise the debt ceiling, pronto.
Unfortunately, the opposite is true.
Some on the right — such as President Trump and his acting chief of staff, Mick Mulvaney — have in the past suggested that defaulting is no big deal, perhaps even desirable. They (mistakenly) think that a debt default would allow those in charge to unilaterally decide which bills deserve payment and which don’t, bypassing the democratic budget process.
Other politicians who do understand the urgency aren’t necessarily better behaved. Lately, every year or so, opportunistic lawmakers have taken the debt limit hostage, using its must-pass legislation as a vehicle for forcing through pet policies.
Though we (thankfully) haven’t defaulted yet, past self-inflicted crises have nonetheless been costly. The 2011 debt-limit standoff raised government borrowing costs by an estimated $1.3 billion that fiscal year alone, according to the Government Accountability Office.
Given the debt limit’s negligible upside and seemingly bottomless downside, over the years more economists and good-government types (such as former Reagan administration economist Bruce Bartlett) have advocated eliminating it. And there is, in fact, an “End the Threat of Default Act” sitting in the Senate, sponsored by five Democrats, including presidential candidate and Sen. Michael F. Bennet of Colorado.
Yet leadership of either party shows little appetite for permanently ending this threat. Perhaps they fear the optics of squelching a policy that sounds like it curbs government largesse. Perhaps they want to preserve their own access to this possible bargaining chip, exploited so effectively by Republicans in recent years.
Whatever their reasoning, it’s time to be grown-ups. There are a lot of technical things lawmakers could do right now to make both Wall Street and Main Street stronger, healthier, more financially stable. But arguably the simplest and easiest one — and the one that could have the longest-lasting positive impact — would be to kill this political hostage once and for all.