The most vexing issue in American politics is back, thanks to Republicans regaining control of the House of Representatives in the 2022 midterm elections.
Over the next six months, you will hear about the debt ceiling deadlock that could torpedo the US economy. This is not a natural phenomenon or market anomaly that we have no choice but to deal with. It is a man-made construct that once served a purpose, but has now become a mechanism for the abuse of the majority by a radical minority.
Since 1917, Congress has placed a limit on the amount of money the federal government can borrow. Federal spending and the loans that fund part of it normally increase over time, so Congress must increase the borrowing limit every few years. This used to be done routinely, without fanfare. But over the past 25 years, Republicans have become increasingly militant, using their debt ceiling extension votes as leverage for other political demands.
That’s what they plan to do again in 2023. The Treasury Department says it will hit the $31.4 trillion borrowing limit on January 19. If Congress simply voted to extend the borrowing limit, nothing remarkable would happen. But the Republicans who now control the House say they will raise the borrowing limit only if Democrats agree to big cuts, which Democrats won’t. So the deadlock is on.
For months on end, the Treasury can use “extraordinary measures” to throw money around and pay the nation’s bills, including interest payments on government bonds, Social Security and Medicare payouts, and countless other obligations. The real crisis will come sometime in early summer, when the Treasury has exhausted these extraordinary measures. At that point, it would only be able to cover bills with incoming tax revenue, leaving some unpaid. Economists think that even a small default on US government debts would trigger a financial earthquake.
Here are three basic things to know about this unnecessary drama.
1. It’s nothing but a political stunt. Always been. Always will be. Republicans portray themselves as fiscal hawks disgusted by the bloated government and $31 trillion national debt. They will demand spending cuts as a condition of voting for a higher borrowing limit. And they’re not wrong about the gross mismatch between the amount Washington spends and takes in through federal revenue, resulting in a $1.4 trillion deficit by 2022.
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But the Republicans are simply not serious about closing the deficit or reducing the national debt. If they were, they would support a robust tax agency that collects all the taxes Americans legally owe and try to close the “tax gap” of a whopping $1 trillion a year. Instead, Republicans who controlled one or both houses of Congress underfunded the IRS for a decade, rendering it unable to oversee the complex and perhaps fraudulent tax returns of wealthy petitioners like Donald Trump. Last year, the Democratic-controlled Congress approved an additional $80 billion in IRS funding over the next 10 years to make up for years of cuts. A demand from House Republicans is now to cancel that new funding.
If Republicans really wanted to cut federal deficits, they’d propose cuts where the most money is. But you won’t hear that from them this year. The top three spending categories are Social Security, defense, and Medicare, which account for nearly 50% of all federal spending. Republicans typically view defense as off limits. There are occasional murmurs about cutting Social Security and health care, but these are popular programs and only a handful of Republicans are willing to risk voter wrath. What Republicans do want to cut is Medicaid, which mostly serves the needy, along with the much smaller budgets for so-called discretionary programs like transportation, education, housing, and countless other things. Those programs are peanuts, in terms of where you could find real savings if you were serious about it.
Democrats, for their part, are playing their own political game with the debt ceiling, which is mainly to step aside and let the Republicans show their recklessness. The Democrats could have extended the debt ceiling through late 2024 during the slack session after the midterms, when they still controlled Congress. They didn’t, probably because they thought Republican threats to break the government in 2023 would scare voters. They’re probably right about that. At just the right time, President Biden began calling Republican debt-ceiling deniers “fiscal dementia.” Democratic complacency is part of the usual script.
2. Congress will eventually raise the debt ceiling. It always does, making more and more borrowing possible.
3. But the process of getting there can do real damage. The worst example of this occurred in 2011, when Congress passed a debt ceiling extension just hours before the Treasury would have been unable to make some payments. That followed months of bickering similar to what is likely to follow this spring. The near-default prompted Standard & Poor’s to downgrade the US credit rating by one notch for the first time ever.
Stocks began to swoon about 10 days before the default date that summer. Then they collapsed after S&P’s downgrade. By mid-August, the S&P 500 index was down 17% from its peak in July. It took the market six months to recover those losses.
Republicans are signaling they may be willing to replay 2011 in 2023, which is likely to cause some market anxiety until Congress resolves the issue. “Raising the federal debt ceiling later this year will require a bipartisan compromise, most likely with measures to modestly reduce the budget deficit,” Capital Economics advised in a Jan. 17 analysis. “But a deal is likely to be reached only at the last minute, increasing the risk of inadvertently missing the ceiling-lifting deadline.” Why cultivate tranquility when you can sow chaos?
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter @rickjnewman
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