As if the country needed any more divisive issues to battle over, one of them with the heaviest financial clout is about to come to the front burner.
The debt ceiling limit has become a ‘wedge’ issue yet again as partisan Republicans in the so-called Freedom Caucus try to force the Biden Administration to make social safety net program cuts under the threat of defaulting on debt payments due soon that could threaten the U.S. and world economy.
In this country, the term ‘debt ceiling’ is a limit on the amount of national debt that can be incurred by the U.S. Treasury, thus limiting how much money the federal government can pay on the debt they have already incurred.
During World War I, Congress created the debt ceiling with the Second Liberty Bond Act of 1917, which allowed the Treasury to issue bonds and take on other debt without specific Congressional approval, as long as the total debt was under the statutory ‘debt ceiling.’
Many countries have laws in place to limit their debt. But only Denmark and the United States have debt ceilings that are set at an absolute amount rather than a percentage of Gross Domestic Product (GDP).
Democrats and Republicans have battled repeatedly over raising the debt limit, with verbal crossed swords backed by each party’s vision of what the government is, and can do, in governing.
The lack of an agreed-upon spending plan by Congress can, and has, caused funding shortfalls, furloughs of federal employees, and at least partial shutdowns of government operations.
During the Trump years conservatives were all for raising the debt ceiling. Image courtesy of Conservativehq.com
Recent shutdowns have included, according to Wikipedia; a 21-day shutdown in 1995–1996 during the Clinton administration over opposition to major spending cuts. This was followed by a 16-day shutdown in 2013 in the Barack Obama administration in a bitter partisan dispute over the implementation of the Affordable Care Act (ACA). The longest shutdown in U.S. history, 35 days, was in 2018–2019 during the Donald Trump administration, over a dispute on funding for an expansion of the ill-fated U.S.–Mexico border barrier
The standoffs have led to ‘brinksmanship’ strategies seemingly allowing the possibility of the U.S. defaulting on its debt, which it has never done. Usually the threat looms until a last-minute deal is struck, or temporary funding is passed that delays the political confrontation while keeping the government in operation.
This time the extreme right of the GOP acts as if it somehow has more leverage. Its leaders, including House Speaker Kevin McCarthy, are threatening to let U.S. debt default unless they get certain demands for large program cuts.
Those threatened programs include the so-called “social safety net”, designed to protect government programs to aid the most vulnerable; the elderly, disabled, the very young, and others who are disadvantaged.
Expert have predicted that chaos might follow if essentials such as Social Security, Medicare, and other payments to citizens who’ve earned them were to be halted for any length of time.
According to the watchdog group, The Committee for a Responsible Federal Budget: A default, or even the perceived threat of one, could have serious negative economic implications.
An actual U.S. debt default would roil global financial markets and create chaos, since both domestic and international markets depend on the relative economic and political stability of U.S. debt instruments as well as the U.S. economy.
Forecasts by experts say interest rates would rise, and demand for Treasuries would drop as domestic and international investors halt or scale back investments in Treasury securities if they are no longer considered safe, thereby increasing the risk of default.
The Committee for a Responsible Federal Budget points out that even the threat of default during a standoff increases borrowing costs. The Government Accountability Office (GAO) estimated that the earlier 2011 debt ceiling standoff raised borrowing costs by a total of $1.3 billion in Fiscal Year 2011, and the 2013 debt limit impasse led to additional costs over a one-year period of between $38 million and more than $70 million.
If Treasury interest rates increased substantially, interest rates across the economy would be affected, from car loans to credit cards, home mortgages, business investments, and others.
Experts say the balance sheets of banks and other institutions with large holdings of Treasuries would decline as Treasury values dropped, potentially tightening the availability of credit, as most recently seen during the ‘Great Recession.’
A September 2021 Moody’s Analytics report estimated that a default could have similar macroeconomic consequences as the Great Recession.
It predicted a potential four percent Gross Domestic Product (GDP) decline, nearly six million lost jobs, and an unemployment rate of nine percent. Moody’s also predicted a $15 trillion loss in household wealth, with stocks dropping by as much as one-third at the depths of the selloff.
Politico reported Office of Management and Budget (OMB) Director Shalanda Young said that President Joe Biden wants the debt ceiling to be raised without any preconditions.
“Let’s not hold the debt ceiling hostage to really draconian cuts all to help the wealthiest in this country,” Young said on CNN’s “State of the Union.”
The House Freedom Caucus issued a proposal last week that called for significant spending cuts as a condition for increasing the nation’s debt ceiling (“that would mean slashing funding by $131 billion below current law,” the plan said).
Their proposal stood in stark contrast to Biden’s budget proposal released last Thursday; he’s called for a seven percent increase over current non-defense spending levels and higher taxes on wealthier Americans.
OMB Director Young said the stance of the House Freedom Caucus allows for a clear contrast of the priorities between the president and House Republicans.
She also pointed out that the debt ceiling was raised three times during the Trump administration without these types of preconditions.
While the Freedom Caucus plan did not call for cuts to Social Security, Young said that Republican policies pose a threat to it.
“Let me be clear, the top existential threat to Social Security is those in this town that want to cut it,” Young said. “I wish we were in the part of the debate where we could talk about extending (benefits). This president chose to focus on protecting benefits.”
On the same CNN program, Rep. Nancy Mace (R-S.C.) said she was bothered by Young’s remarks on the debt ceiling negotiations.
“The comments by the director of OMB on this program a few moments ago were disturbing to me just not even as a member of Congress, but as an American,” Mace said, adding: “We should be negotiating on this issue. This shouldn’t be one-sided.”
Even more partisan rhetoric can be expected as we approach late Spring and Summer when the fiscal impacts of any standoff would begin to be felt.
The usual targeting of ‘entitlement’ programs by far-right GOP members, is expected to come despite promises from some to leave Social Security and Medicare off the table, as well as GOP calls for corporate tax breaks and preserving or boosting military spending.
Democrats will counter that likely saying that the GOP trying to get their way by jeopardizing our national fiscal standing shows hypocrisy on the part of hard-right Republicans. They have helped increase the national debt by about $31 trillion dollars while giving tax breaks to large corporations and billionaire political donors.
More of the partisan cold war in America will rancorously play out soon; just when we’ve seen quite enough of the overplayed drama from the congressional minority that seemingly utilizes political tantrums to try to ‘get its way.’
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