Can the Current Debt Limit Crisis Be Solved?
The U.S. government hit its statutory debt limit last week. No need to panic yet — the Treasury Department is undertaking “extraordinary measures” that will keep the United States from defaulting on its obligations for a few months.
But you can bet federal policymakers will be consumed with this issue over the for the foreseeable future. (The extraordinary measures are expected to last until only sometime in June.) Which is why, this week, we provide a refresher on what the federal debt limit is, what happens if Congress fails to raise it, and some options and ideas that could help the U.S. government avoid default.
Is the Debt Limit Like a Credit Card?
The credit cards in our wallets generally come with a limit on what we, as cardholders, can borrow. If we try to make a purchase that exceeds this credit limit, our card is declined.
When a credit card is declined, it’s embarrassing. It’s inconvenient and, unless you have other means, it’s going to keep you from buying things you might need. It may even be a signal you should spend less. But, make no mistake, if you’ve hit your credit limit, it’s because of what you’ve already spent in the past.
The U.S. government’s debt limit is, generally speaking, analogous.
Congress must raise the debt limit because of the obligations it made over almost its entire history — from the pre-Civil War era until today. (We say “almost its entire history” because the federal government has actually been debt free before. The last time was 1835, however.) As Brookings Institution scholars Leonard Burman and William Gale explained, “Voters often incorrectly assume — and lawmakers often incorrectly assert — that a vote to raise the debt ceiling is a vote for more red ink. … [But] arguing about increasing the debt limit is like having a person charge vacation expenses to his credit card and then debat[ing] whether he should pay the credit card company when the bill comes due.”
In other words, in fighting about the debt limit today, lawmakers really are fighting about spending on the sum total of all of the programs and priorities to which Congress has appropriated funding over the last century.
Most countries authorize debt in a different way, by simply automatically granting authority to their federal government to borrow to make up any difference between the government’s spending in a particular year and its expected revenues. Only one other developed country, Denmark, conducts its fiscal business in a similar manner to the United States.
Not Paying Credit Card Bills Has Big Consequences
Not paying a credit card bill will affect a person’s long-term credit worthiness, making it harder for them to get a loan to buy a house or car, or even risking bankruptcy.
The same chaos would happen if the United States defaults on its past debts. Of course, instead of impacting just one person or family, default in this context would affect the entire global economy. Indeed, according to Burman and Gale, “The economic consequences of a large-scale, intentional default are unknown, but predictions range from bad to catastrophic.”
How catastrophic? The two scholars remind us that, in 1979, an inadvertent, temporary partial U.S. government default happened because of an administrative error. That mistake — a technical glitch that only slightly delayed payment on U.S. bonds – stands as the only federal default in U.S. history. The U.S. government’s borrowing costs increased by approximately $40 billion as a result.
According to Burman and Gale, if Congress does not raise the debt limit by this June, it would have to cut spending or raise taxes by $1.5 trillion this year and $14 trillion over the next 10 years to avert ongoing, intentional defaults. For context, in fiscal year 2022, the federal government spent $6.27 trillion. Cutting government spending by $1.5 trillion would mean reducing the federal government by about one quarter. Overnight.
The country also would probably fall into recession nearly immediately. The stock market would be increasingly volatile and, according to CNBC, “borrowing costs would rise for American consumers, since rates on mortgages, credit cards, auto loans, and other types of consumer debt are linked to movements in the U.S. Treasury market.” Small businesses would pay higher interest rates on loans and “affected households would have less cash on hand to pump into the U.S. economy.” Job losses and higher unemployment would soon follow.
As The Hill reported, Mark Zandi, chief economist for Moody’s Analytics, estimated the United States would lose six million jobs, $12 trillion in household wealth, and four percent of gross domestic product if the country defaults.
Which begs the question: is there hope that a default can be avoided?
How the United States Could Avoid Default
The first option for solving the current debt crisis, of course, is for the Republican-held House and the Democratic-led Senate to come together to pass legislation to increase the current debt limit that President Biden will sign into law.
This option is something lawmakers have done dozens of times in the modern era. According to the Treasury Department, since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit. More than half of those votes, 49, happened under Republican presidents. Congress voted 29 times to raise, extend, or revise the debt limit when Democrats were in the White House.
House Republican leadership has made it clear it will not support a debt limit increase without spending cuts to go along with it. (A group of Senate Republicans that helped broker deals in the past has said it is content to let House lawmakers take the lead on current negotiations.)
This week, Senate Majority Leader Chuck Schumer (D-N.Y.) called on House Republicans to outline the spending cuts they want. Minority Leader Schumer also said Democrats are ready to “move quickly” on this matter.
According to The Associated Press, the White House is not fully open to working with House Republicans, however. Yesterday, reporter Lisa Mascaro wrote, “The Biden White House appears to have drawn the conclusion that it’s not worth negotiating with new House Speaker Kevin McCarthy, who won a slim GOP majority in last November’s midterm elections and who may — or may not — be able to deliver the votes on any debt ceiling deal.”
So let’s look at a second option: to end the debt limit altogether. Last week, Rep. Bill Foster (D-Ill.) introduced the End the Threat of Default Act, legislation that would do just that. The bill already has 42 cosponsors, but it’s unlikely to gain support from Republicans, who see the debt limit vote as leverage for negotiations over government spending levels. The commander in chief also does not seem to support this option. As Roll Call reported at the time, last fall, President Joe Biden rejected a push from congressional Democrats to get rid of the statutory debt ceiling, calling the idea “irresponsible.”
Last week, some lawmakers resurrected a third idea: Treasury could simply mint a $1 trillion platinum coin to give the federal government more borrowing authority. According to ABC News, a law signed in 2001 by then-President George W. Bush allows the Treasury to mint platinum coins of any value without congressional approval. “In theory,” ABC News explains, President Biden could order Treasury Secretary Janet Yellen to have this coin “minted and deposited into the Treasury, giving the government an extra trillion dollars to cover debts and prevent default.
The option was first floated in 2011 during that year’s debt limit standoff. In an interview six years later (after he was out of the White House), President Barack Obama called the idea “wacky” and “primitive.”
Treasury Secretary Janet Yellen also has poured cold water on the idea, noting that the Federal Reserve would be unlikely to accept the gimmick. The Federal Reserve would not comment on the idea.
There is one more option that might break this logjam.
As is typical two years into a president’s first term, the White House is going to see significant personnel changes over the next few months, including within the National Economic Council team, which advises the president on all things related to fiscal and economic issues. While the current team has encouraged the president to dig in on the debt limit, new senior staff could have a different perspective. That includes incoming White House Chief of Staff Jeff Zients, who was the deputy director of the Office of Management and the Budget when President Obama and Speaker John Boehner (R-OH) reached a deal in 2011 to raise the debt limit and reduce government spending.
That experience could help inform strategy at the White House over the next few months. Indeed, these dynamics might explain why aides to President Biden and Speaker McCarthy are working to set up a White House meeting over the next few weeks, before the President’s State of the Union Address, between the two men where the speaker would have his first opportunity to discuss — and begin to negotiate on — the debt limit. While a meeting this early on is, on its face, a positive development, past experience suggests that the initial negotiation sessions between the two parties on issues of this magnitude provide for more theater than substance.
All of this is to say: this process is going to take a while to play out, and it’s not yet at all clear how – or whether – it ultimately will be resolved.
Steve Boms is the founder and President of Allon Advocacy, LLC, a Washington, D.C.-based public policy consulting firm. Steve has spent his career focused on complex financial services public policy issues, having worked in the United States Congress on the committee with jurisdiction over banking. He has led advocacy efforts and public policy teams globally for equity options exchanges, large U.S.-based financial institutions, and leading fintech firms. In addition to working directly with Allon's clients, he is a frequent conference panelist and his perspective is solicited by reporters on the technology, financial services, and regulatory beats.
The content and opinions expressed herein are provided by a third party, Allon Advocacy, LLC. This commentary is provided for informational purposes only and does not necessarily reflect the views of Envestnet. The information, analysis and opinions expressed herein reflect the judgment of the author as of the date of writing and are subject to change at any time without notice. It is not intended to constitute legal, tax, securities or investment advice.