Another debt ceiling crisis is coming.
By law, when federal government deficit spending reaches the “debt limit,” the amount of money the government is authorized to borrow to meet its legal obligations, including Social Security and Medicare, interest on the national debt, tax refunds, and other payments, then the debt ceiling must be raised. Treasury Secretary Janet Yellen said failure to raise the debt limit would have “catastrophic economic consequences.” Goldman Sachs said the same thing.
SENIOR DEMOCRATIC LAWMAKERS PUSH FOR ABOLISHING DEBT LIMIT
A debt ceiling crisis similar to that of 2011 would roil markets. Equity, debt, and Treasury volatility would spike. In the 2011 debt crisis, the S&P rating for federal debt was lowered from AAA to AA+. At the margin, that caused the cost of capital to increase. At the margin, the growth rate for the U.S. economy fell. Both Democrats and Republicans are responsible for the looming debt ceiling crisis. Under former President Donald Trump, the federal debt increased by $7 trillion, in significant part in response to the coronavirus pandemic.
Now, under President Joe Biden, deficit spending is little different. Since he took office on Jan. 20, 2021, Biden has approved an additional $4.8 trillion in new deficit spending. To compound matters, Congress is considering an omnibus appropriations bill for fiscal 2023, which began Oct. 1, 2022. Even though deficit spending is out of control, members of Congress, both Democrats and Republicans, want to increase spending by 10% from current levels. Republicans want more defense spending. Democrats want more discretionary domestic spending. Quietly both parties are negotiating even more budget-busting policies. Republicans want to modify the tax code so that business Research and Development costs can be expensed, deducted immediately, and not amortized. Democrats want to renew and make permanent the expanded refundable child tax credit so that households with no federal income tax liability but with children would receive generous income transfers.
Neither party talks about revenue enhancers to pay for business tax cuts and expanding income transfers. Yet costs for servicing the federal debt are higher. Economic growth looks slower. Inflation is proving to be entrenched. A recession looks likely in 2023. In a recession, federal tax receipts fall and federal spending rises for unemployment benefits and other stabilizers. In recessions, federal deficits explode.
The negotiators for the omnibus appropriations bill know all this, but both parties just want to keep spending with borrowed money.
So bring on a debt ceiling crisis. The Treasury is right — a debt ceiling crisis will raise the cost of capital for American business. A debt ceiling crisis will raise borrowing costs for the federal government, which must pay interest on a net federal debt of almost $25 trillion. Every 1% increase in borrowing costs equals $250 billion or 1% of GDP. The Treasury is right, a debt ceiling crisis increases uncertainty, which causes business investment to slow. Debt ceiling crises are bad for the nation.
Only a crisis will enable Congress to tell the truth and find a true path forward involving higher taxes and fiscal prudence for entitlements, Social Security, Medicare, and Medicaid. If Congress can’t find that fiscally responsible path, the nation will become ever poorer and citizens will be fighting over scraps. Most importantly, the United States will not be able to defend itself against existential threats. Perhaps a debt ceiling crisis is the only solution left?
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James Rogan is a former U.S. foreign service officer who later worked in finance and law for 30 years. He writes a daily note on finance and the economy, politics, sociology, and criminal justice.
