Debt Ceiling “Chicken”
Second only to the daily revelations of George Santos’ multitude of deceptions in his quest to become a member of the U.S. Congress are countless stories about an impending crisis involving the nation’s debt ceiling. At this point you might be wondering why the federal government even has a debt ceiling. Although the practical answer is because the Congress is addicted to spending more money than it collects in taxes, the technical answer is that the U.S. Constitution (Article 1, Section 8) vest the Congress with the exclusive power to authorize the nation to borrow money.
Because of this provision every time it became necessary to incur additional indebtedness the Congress had to pass a bill authorizing that action. In 1917 Congress decided to simplify its task by periodically passing a bill authorizing the nation to increase its total level of outstanding indebtedness to a specified amount rather than do so on an ad hoc basis. Thus, the debt ceiling was born. Over the years the debt ceiling has been routinely raised to accommodate the growing needs of the country. In fact, it has been increased 107 times in its 105 year history to its current level of $31.4 trillion.
The current (but hardly the first) debt ceiling crisis has arisen because House Republicans have announced that they will not agree to a further debt ceiling increase without corresponding cuts in spending. What makes this a crisis is that Congress has already approved, and the nation has already expended, amounts exceeding the current debt ceiling and now the nation needs to find a way to pay for those expenditures. If the debt ceiling is not raised the nation will default on its outstanding financial obligations resulting in dire economic consequences. In short, what the House Republicans are doing is engaging in a high stakes game of “Chicken” with the Biden administration in an effort to achieve legislative concessions that they do not have the power or political courage to achieve through normal legislative negotiations as envisioned by the nation’s founding fathers.
To better understand the game of Debt Ceiling Chicken it’s important to bear in mind that the debt ceiling is not a limit on spending, but rather a limit on borrowing; and this dichotomy lies at the heart of the current problem. It’s also instructive to review the recent history of adjustments to the nation’s debt ceiling to understand how the game of “Debt Ceiling Chicken” has evolved.
Prior to 1981 the Congress conscientiously sought to balance the nation’s expenditures with its expected tax revenues. That, however, was not always possible as unusual or unexpected events (such as the Great Depression or World War II) necessitated incurring budgetary short-falls. Such short-falls were routinely covered through the sale of government bonds. Because the federal government had significantly increased its income tax rates to pay for the costs incurred in connection with World War II, by 1970 the nation’s aggregate indebtedness had been largely paid down and was relatively small in comparison to its overall economy.
The policy of maintaining balanced budgets, however, underwent a drastic change beginning in the Reagan administration which embraced “supply-side economics” (see, “Partisan Politics”) and enacted a large reduction in federal income taxes. At that time the national debt was still less than $1 trillion. Although the Reagan tax cuts were promoted as being revenue neutral (i.e., there would be no diminution in tax revenues), tax revenues declined sharply which was a principal reason underlying an increase in the nation’s outstanding debt to $2.6 trillion by the end of Reagan’s second term.
Today, President Reagan is generally credited with having brought about the collapse of the Soviet Union. That feat, however, was not the result of a military victory; rather the demise of the Soviet Union was caused by the Soviets’ efforts to keep pace with the U.S. in a costly arms race which they couldn’t afford. Unfortunately, the lessons derived from Reagan’s eight years in office were entirely wrong. Rather than learn that uncontrolled deficit spending can have disastrous effects as it did for the Soviet Union, the nation came to believe that both large tax cuts as well as maximizing investments in military hardware were beneficial. Thus, President Reagan’s eight years in office were even more transformational in the way that the nation would go on to manage its economy.
Although both Reagan and his successor, George H.W. Bush, were both forced to enact tax increases, those tax increases were not sufficient to cover the nation’s rising defense costs. As a result, at the conclusion of Bush’s term in January 1993 the country’s indebtedness had grown to over $4 trillion. To accommodate this increase, the nation’s debt ceiling was increased 25 times during the Reagan and Bush administrations. Even though fiscal conservative expressed their concerns over the rising level of the nation’s indebtedness, there was essentially no meaningful opposition to these increases in the debt cieling.
By contrast, during President Clinton’s eight years in office the debt ceiling had to be raised eight times to accommodate a $1.4 trillion increase in the nation’s level of indebtedness. Republican legislators resisted each of these increases causing the federal government to be shut down twice, with one such closure (in 1995-6) lasting a record-setting 21 days. Part of the reason why deficit increases were lower during the Clinton administration was because Clinton chose to increase taxes, a move which Republican legislators argued would stifle economic growth. Not only did such an decline in the nation’s economic growth never materialize, but the nation’s GDP during the Clinton administration grew by 3.89% which was significantly above the 3.4% and 2.0% GDP increases achieved during the Reagan and Bush administrations. In addition, by the end of Clinton’s presidency in January 2001, the federal government was operating with an annual budgetary surplus.
History repeated itself during the administrations of George W. Bush, Barack Obama and Donald Trump. George W. Bush presided over two major tax cuts which quickly erased the budgetary surplus left to him by President Clinton; and during his eight years in office the nation’s level indebtedness grew by another $4.226 trillion. To accommodate this increase the debt ceiling was raised seven times, with each such increase encountering little or no Congressional opposition. The Bush administration, however, ended with the nation tumbling into a financial crisis generally referred to as the “Great Recession.” That crisis, during which unemployment skyrocketed to 10%, was only halted by a government bailout of the nation’s 25 largest financial institutions and two of the nation’s three largest automobile manufacturers.
In its efforts to restore the nation’s economic health and to conclude a misbegotten war in Iraq, the Obama administration caused the nation to incur additional indebtedness totaling $8.82 trillion. This necessitated 11 increases in the debt ceiling, all of which were opposed by Congressional Republicans. In 2011, Congressional Republicans used the debt ceiling as leverage for budget reductions. This triggered a downgrade in the nation’s credit as well as a 2,000 point drop in the Dow Jones Industrial Average. In addition, the GAO estimated that the delay in raising the debt ceiling increased the nation’s borrowing costs by $1.3 billion in 2011 and the Bipartisan Policy Center estimated that the after-effects of the delay would cost another $18.9 billion over the next ten years.
This lesson was soon forgotten and in 2013 Congressional Republicans fomented yet another debt ceiling crisis demanding the repeal of the Affordable Care Act. The ACA was particularly loathsome to House Republican who during the Obama administration passed over sixty bills seeking its recission. Their objection to the ACA was not so much due to the its impact on the federal budget as the ACA was partially funded by a panoply of tax increases and other revenue enhancements. Rather, it was the revenue enhancing features contained in the ACA that they found objectionable. This crisis led to a 16-day shut-down of the federal government which was ultimately settled with an agreement to impose a cap of federal expenditures which had the effect of slowing the nation’s recovery from the Great Recession. Still, Republican legislators blamed the nation’s slow economic recovery on “the failed policies of the Obama administration.”
Like Ronald Reagan and George W. Bush, Donald Trump began his term as president by enacting a large tax cut (the Tax Cuts and Jobs Act of 2017) which, among other things, reduced the corporate income tax rate from 35% to 21%. Like his predecessors, President Trump promised that this tax legislation would be “revenue neutral.” He also promised that it would “supercharge” the nation’s economy and “raise average annual household income by $4,000.” The Trump tax cuts, however, were not revenue neutral but rather have been calculated to increase the nation’s deficit by almost $2 trillion. Nor did not they spark an increase in the growth of the nation’s economy which during the first three years of the Trump’s presidency grew at an annual rate of 2.5%, the same rate of growth achieved during the final three years of the Obama administration. In the final year of Trump’s presidency the world was beset by the Covid-19 pandemic which sent the nation’s economy into a tailspin. As a result, by the end of the Trump administration the nation’s indebtedness had grown by another $8.2 trillion requiring the debt ceiling to be raised three times, none of which increases were met with Congressional opposition.
The nation’s deficit continued to grow during the first two years of the Biden administration in part due to its having to work with a tax system hamstrung by the repeated tax cuts enacted by President Reagan, Bush and Trump. During those two years the nation’s economy was also still reeling from the Covid pandemic. Now the nation is again up against the debt ceiling. Naturally the Biden administration is hoping that it will be increased unconditionally as it has been for decades during Republican administrations. While Mitch McConnell has indicated that Senate Republicans will not stand in the way of an increase in the debt ceiling, House Republicans have already served notice that they will not follow McConnell’s lead. Much to the contrary, a highly vocal group of House Republicans (“the Freedom Caucus”) has announced its intention not to approve another increase in the debt ceiling without significant cuts in spending.
To that end, the Freedom Caucus has extracted promises from House Speaker McCarthy not to agree to any increase in the debt ceiling without substantial cuts in social welfare programs. Although the looming fight over raising the debt-ceiling has been couched as an effort to achieve greater fiscal responsibility, that rationale is undermined by actions already undertaken by the new Republican majority in the House, including its passage of a bill drastically reducing the IRS’s budget. Far from curtailing growing budgetary deficits, this bill (which will never even be considered in the Senate) would actually result in greater deficits because it would decrease tax revenues by an estimated $114 billion over the next 10 years.
Still, it’s understandable that the members of the Freedom Caucus would seek to justify their current mischief-making as an effort to rein in runaway spending by the Democrats. After all, their voter base is essentially composed of fiscal conservatives who have been schooled in Richard Nixon’s warning that “Every housewife in America knows that if you spend more than you take in you’re going to end up in deep trouble.”
In one sense, their assertions that Democrats are responsible for the current level of the nation’s indebtedness are correct. Clearly, the Democrats have championed the nation’s social welfare programs (including Social Security, Medicare and Medicaid) which represent almost 50% the federal government’s annual expenditures. Although all of these programs were enacted over the objections of Republican legislators, the Republicans have had several opportunities to repeal them but have never done so. Moreover, all of these programs were enacted when tax rates were much higher and those tax rates have been constantly reduced by Republican administrations over the past 40 years. In short, both political parties bare responsibility for the current magnitude of the nation’s debts.
Rather than trying to pin the blame on the other party, politicians should be focusing on three questions: (a) whether the nation has any real choice in deciding whether to raise the debt ceiling; (b) how should it go about bringing its growing annual budgetary deficits under control and (c) how quickly must that be achieved. There are, of course, logical answers to each of these questions. Unfortunately, they are not being posed to a gathering of academics. Instead, they are to be decided by the U.S. Congress where political considerations often bedevil logic.
The answer to the first question is relatively simple. The nation’s indebtedness, as a percentage of its GDP, has now grown to 136% which is significantly higher than it was during the Obama administration or even following the end of World War II. This means that the risks posed by a default are now much greater than at previous times. Virtually every economist agrees that defaulting on the nation’s indebtedness will have catastrophic consequences, including the possibility of triggering a worldwide recession with staggering amounts of unemployment. It could also undermine the U.S. dollar’s position as the world’s currency of choice which allows the U.S great latitude in engaging in deficit financing. Mark Zandi, chief economist at Moody’s Analytics, has predicted that even “a prolonged impasse over the debt ceiling would cost the U.S. economy up to 6 million jobs, wipe out as much as $15 trillion in household wealth, and send the unemployment rate surging to roughly 9 percent from around 5 percent.” Accordingly, it would not only be irresponsible, but also economically suicidal, not to quickly raise the debt ceiling.
The question remains how this is to be achieved. At this point the parties are engaged in political posturing. In an effort to discourage Republican legislators from playing this game, President Biden has taken a firm position that any bill raising or suspending the debt ceiling must be unconditional. While Mitch McConnell and the leadership of the Republican Party share the President’s view, there is now a growing and vocal faction within the Republican Party (often referred to as “MAGA Republicans”) who do not share that view. Over the past 40 years their lives have improved little even though the nation’s economy has prospered. Their political mantra seems to be based on Ronald Regan’s admonition that “The nine most terrifying words in the English language are ‘I’m from the government and I’m here to help’.” They see the federal government as an alien force that taxes their income and infringes their liberty. Thus, they have little concern over opposing governmental action (which they characterize as “sticking it to the libs”).
This is particularly problematic because this group seems to have no clear idea what or how much it wants for its agreement to allow our government to pay the bills it has already incurred. Part of their confusion is that their champions in the Freedom Caucus have told them that the nation needs cuts in government spending. However, the spending programs that might get cut could be among of the very things that sustains them. Even members of the Freedom Caucus are uncertain what ramson they should demand. Their Party’s donor base would like tax cuts and rollbacks of social welfare spending, but Donald Trump, their spiritual leader, has warned against demanding cuts in Medicare and Social Security.
The one thing that is clear is that the current stand-off is not going to be resolved anytime soon. The members of the Freedom Caucus will play this game as long as they can because it gives them an opportunity to appear on Fox News and other right-wing media outlets and pontificate how they are opposing the unbridled spending of a rogue government. The Biden administration will also be loath to rush to make any offers knowing that they won’t be accepted until those opposing raising the debt ceiling are pressured to cut a deal. That pressure will likely emanate from the Republican Party’s donor base which will be growing more and more apprehensive as the stalemate continues and financial conditions deteriorate in anticipation of a world-wide recession. Caught in the middle of this game of “Chicken” will be Speaker McCarthy who will receive criticism from all sides no matter what he does. Ultimately, the Biden administration will make some concessions although they are not likely to be tied to an increase in the debt ceiling.
Ross Douthat has suggested that the impasse will be resolved by authorizing more spending for border security, instituting a collection of miscellaneous funding cuts and repurposing unspent pandemic relief money (which was an important catalyst in passing the Biden administration’s infrastructure legislation). What will not be in any resulting deficit reduction bill will be an increase in taxes (mother’s milk for Republican politicians) or cuts in defense spending (even though the latest defense appropriation exceeded the Pentagon’s request). No matter what concessions the Biden administration is ultimately forced to accept, they will not have a significant impact on the nation’s rising level of indebtedness.
While the Biden administration and the Freedom Caucus are going through their Kabuki dance over raising the debt ceiling, Treasury Secretary Yellen (who is probably now wondering why she ever agreed to serve as Treasury Secretary) has begun juggling expenditures in an effort to buy more time. She has announced, however, that her efforts will be exhausted by mid-June. Initially, she will halt funding for various pension and reserve accounts. If the impasse continues, she will be forced to prioritize among various expenditures the government is already legally bound to make, such as paying for Social Security, issuing tax refunds and paying the salaries of members of the military and other federal employees (but probably not members of Congress).
To be sure, several alternative schemes have been floated for avoiding the adverse consequences of an impasse over the debt ceiling, such as initiating a discharge petition to force a vote in the House, minting a $1 trillion coin to facilitate further borrowings by the federal government and invoking Section 4 of the 14th Amendment. For reasons more fully explored by the Congressional Research Service, each of these escape avenues does not appear to be practical.
Of course even a relatively speedy resolution of the current impasse will not prevent this recurring nightmare that the nation seems to face every couple of years. That’s because annual federal budget deficits are expected to grow at an annual average $1.3 trillion over the next ten years unless meaningful remedial measures are taken. While some economists, like Paul Krugman, believe the magnitude of our national debt is not a cause for alarm, others like Nouriel Roubini have expressed a decidedly more pessimistic view.
While economic theories do not always provide the correct answers, the numbers are clearly not moving in the right direction. The nation’s annual GDP is currently approximately $24 trillion and it grew at the rate of 2.9% during the last three quarters of 2022. Even if that rate of growth were to continue ,annual GDP would only grow by $700 billion which would result in an annual budgetary shortfall, causing the nation’s deficit to increase by another $600 billion. This problem would become even more acute if the nation encounters the recession that has been predicted for this year.
What is obviously required is a significant increase in the rate of growth in the nation’s economy while slowly decreasing the annual deficit. By any standard, this will be a difficult feat as reducing the annual deficit will likely cause a reduction in the rate of the nation’s economic growth. Restoring the nation’s fiscal health will therefore require a well-calculated combination of tax increases and spending cuts that will have minimal adverse impact on economic growth. Taxes that will least impair economic growth are those that target wealth and the wealthy. Sin taxes on alcohol, tobacco, firearms and gambling also have a minimal impact on economic growth. These taxes also tend to minimize social suffering and unrest.
On the spending side, politicians routinely say “We must eliminate fraud and waste” --which roughly means “I don’t know what spending should be cut” or “I don’t want to tell you.” It’s not that our government is free of fraud and waste, it’s just that fraud and waste must be eliminated at lower levels of the federal bureaucracy and there is little incentive at those levels to make the necessary spending cuts. Moreover, the cost of identifying and eliminating fraud and waste may be greater than what is being stolen and wasted. The real answer is that spending should be focused on the projects that grow the economy such as investments in infrastructure (both human and material) and research and development. On the other hand, less of the nation’s resources should be directed by our fears such as defense spending, shoring up our borders and incarcerating otherwise productive workers.
Unfortunately, getting the U.S. Congress to set partisan politics aside and devise and pursue such a rational plan seems unlikely.