How ominous is debt-limit problem?
The U.S. government on Thursday ran up against its legal borrowing capacity of $31.381 trillion, and the Treasury Department began implementing “extraordinary measures” to avoid a default.
Sounds ominous, right? But — take a breath — the phrase technically refers to a bunch of accounting workarounds.
Because the debt cap limits the issuance of govbeen ernment bonds — a way that the U.S. borrows money — these workarounds shift money among accounts and should keep the government open through at least June, according to a letter last week by Treasury Secretary Janet Yellen.
In theory, President Joe Biden and Congress are supposed to use that additional time to work out an agreement to raise the nation’s debt ceiling. These talks often grow heated and go down to the wire, with major economic damage in the balance. But there have roughly 80 deals to raise or suspend the borrowing cap since the 1960s.
What could be worrisome is not the existence of “extraordinary measures,” but what happens if they are exhausted this summer without a deal in place. Economists have warned that could lead to a global financial crisis.
So far, House Speaker Kevin McCarthy, R-Calif., and Biden, a Democrat, are playing what could be a dangerous game of chicken with the world’s largest economy in the middle.
What happens if these “extraordinary measures” are exhausted without a debt-limit deal is unknown. A prolonged default could be devastating, with crashing markets and panicdriven layoffs if confidence evaporated in a cornerstone of the global economy, the U.S. Treasury note.
WHY DO WE HAVE A DEBT LIMIT?
Before World War I, Congress needed to approve each bond issuance. The debt limit was created as a workaround to finance the war effort without needing a constant series of votes.
Since then, a tool created to make it easier for the government to function has become a source of dysfunction, stoking partisan warfare and creating economic risk as the debt has increased in size over the past 20 years.
HOW RISKY IS THE BRINKMANSHIP?
It looks alarming — and it’s unclear how Biden, McCarthy and the Democratic Senate will find common ground. A default could cause millions of job losses, a deep recession that would reverberate globally and, ironically, higher interest rates that would make it harder to manage the federal debt.
McCarthy said Tuesday that talks should begin immediately on the potential spending cuts that Republicans are seeking in exchange for raising the debt limit even though the Biden administration has equated that demand to holding the U.S. economy hostage.
“Who wants to put the nation in some type of threat at the last minute of the debt ceiling?” McCarthy said. “Nobody wants to do that. That’s why we’re asking, ‘Let’s change our behavior now. Let’s sit down.’ ”
The Biden administration wants the borrowing cap increased without any preconditions.
White House press secretary Karine Jean-Pierre, asked twice on Wednesday if there was evidence that House Republicans can ensure the government would avert a default, said it’s their “constitutional responsibility” to protect the full faith and credit of the United States. She did not say whether the White House saw signs that a default was out of the question.
DO DEBT LIMIT SHOWDOWNS HELP REDUCE GOVERNMENT DEBT?
Not so much.
The Congressional Budget Office estimates that annual budget deficits will grow from roughly $1 trillion to more than $2 trillion over the next 10 years.
The imbalance over the coming years increasingly reflects government expenses are outstripping tax revenue. That suggests the government would need severe cuts to spending, major tax hikes or some combination of those options.
In 2011 when Barack Obama was president and Biden was vice president, there was a bipartisan deal to raise the debt limit by $900 billion in return for $917 billion worth of automatic spending cuts over 10 years.
But the debt reduction never fully materialized.
After Donald Trump became president in 2017, Republican lawmakers fueled further debt increases by passing deficit-financed tax cuts. Debt accelerated even more with the start of the COVID-19 pandemic in 2020, which caused massive government borrowing to pull the U.S. out of a deep recession.
The CBO last year estimated that the U.S. debt would exceed $40 trillion in 2032.