Don't stop me, even if you've heard this one.
The debt limit is back. Congress is having another moment.
And this particular round of wrestling over the issue could carry the ugliest economic consequences yet.
The U.S. government technically ran out of money to meet its myriad obligations on Thursday. Everyone is still getting paid, for now, because the Treasury can use what it calls "extraordinary measures" to move government assets around and provide cash.
But by summer, if not sooner, cash will not be available to repay bond holders and other creditors for the loans that have already come due. Nor will there be cash to pay the military, or the millions of other federal employees and pensioners, or the beneficiaries of Social Security, Medicare, Medicaid and other entitlement programs. And that's just the payroll, leaving aside all the purchases and contract work.
That adds up to an awful lot of unpaid and unhappy people — but that's not the only reason defaulting on the debt has historically been regarded as unthinkable. If the U.S. were to default, all those unpaid creditors would be under pressure from their own creditors, setting off reverberations in credit markets worldwide.
But for those on Capitol Hill who would threaten a default as a means to compel concessions on policy, the destructive power of default is what makes it makes attractive as a tactic.
And so we find ourselves at the brink of yet another crisis. We have been here before. But this time the House's new Republican majority is largely driven by a faction that says it will hold the debt limit vote as a hostage to win policy changes. And that faction has already demonstrated it has unprecedented leverage over the new speaker of the House, Kevin McCarthy.
What is the debt limit?
The debt limit — also known as the debt ceiling — is not in the Constitution nor in any of its 27 Amendments. It's just a statute, a law, enacted as part of legislation allowing the government to issue bonds to finance U.S. participation in the First World War in 1917. It has been in place, causing headaches and prompting evasive action, ever since.
The total debt accumulated by the U.S. government has been growing with each budget deficit since the 1700s. But when Congress wanted to issue those war bonds in 1917, there was resistance from legislators who opposed adding debt or just opposed entering the war. (At the time, many Midwesterners, German-Americans and Irish-Americans were opposed to the U.S. going to war on the side of Great Britain.)
The debt limit was a device to move the bonds bill. The initial limit was a few billion dollars, big money then but not enough for the tasks ahead. It soon proved inadequate, so Congress raised it. Soon, Congress raised it again. And again. In 1939, anticipating U.S. entry into the Second World War, Congress restructured the debt and raising the limit became more or less routine.
Since 1960, the limit has been lifted 78 times. Democrats have been in the White House for 30 of those years and worked with Congress to get 29 of those increases. Republican presidents have done it 49 times. For most of that time, raising or suspending the limit was just the last stitch in the federal budget and spending process.
The debt limit could be eliminated entirely by statute, just as it was created. But if votes to raise the limit are unpopular, the fallout would be worse if Congress chose to abandon the limit altogether.
As a result, presidents have gone on asking Congress to raise the limit and congressional leaders have found ways to get the votes to do so. And the national debt, and the limit, have continued to rise.
The limit and the debt neared the trillion-dollar level for the first time late in the 1970s. Ronald Reagan made that a major campaign issue in 1980, but while he was in office the limit was raised more than a dozen times and reached $2.8 trillion.
In 1990, under President George H.W. Bush, the limit was set at more than $4 trillion, making the 1980s the decade with the biggest percentage increase in the debt and the debt limit.
Under Bill Clinton, the limit went to about $6 trillion (1997) and under George W. Bush to roughly $11 trillion (2008). The last time a new limit was set under Obama it was $18 trillion (2015) and the last time under Donald Trump it was $22 trillion (March 2019). Thereafter, in the pandemic, Congress suspended the limit so as to spend without even minimal restraint. The debt rose to more than $27 trillion. The current limit, set in 2021, is $31.4 trillion.
OK, but what does hitting the debt ceiling mean for you?
When Washington talks about trillions, it's like hearing astronomers talk about light years. It's easy for the rest of us to feel irrelevant, tempted to just tune out.
But you don't have to be an economist to know a U.S. debt default is the last thing the world economy needs right now. There is already a possible recession looming. So jobs and livelihoods are at risk, not to mention higher borrowing costs and taxes down the road.
So even if you don't get a federal check of any kind (including a tax refund), the fallout from default would be likely to reach you sooner than later. Few escape unscathed in a recession, and a recession driven by chaos in credit markets would stir memories of the panic of 2008 and the Great Recession that followed.
A key point here is that the U.S. has never defaulted on its debt. That is one big reason for the dollar being the world's strongest currency and for bonds issued on the "full faith and credit" of the U.S. government being the global standard of investment security.
World credit markets depend on this relationship as their baseline. And that affects markets in commodities, stocks and bonds and all other asset classes. The full faith and credit of the U.S. is foundational to the economic well-being of this country, its trading partners and the world at large.
Moreover, if the U.S. government had to give up its perfect credit rating, it could expect to pay more and possibly much more to borrow what it must — both now and in the future. And that would mean higher taxes or still more need to borrow even larger amounts – or both.
So what's the controversy? Why the perennial debt ceiling fights?
A key point to remember: raising the debt limit is not about spending in the future. It is about meeting the cost of existing commitments the government has already made. The time to cut back future spending is in the budget and appropriation processes the government goes each year in anticipation of the next. That is where the future is determined. The debt limit is about owning up to the past, paying the bill that has arrived for previous purchases and commitments.
"Without qualification, the debt limit must be increased or suspended, and it should be done as quickly as possible," said Maya MacGuineas this week. As president of the nonpartisan Committee for a Responsible Federal Budget, MacGuineas has personified the case for budget restraint and shrinking the deficit.
"Politicians who are rightly worried about the nation's unsustainable borrowing path should take a hard stance against new borrowing and oppose legislation that would add to the debt ... rather than threatening not to pay the bills on borrowing that has already been incurred."
But precisely because the deficit hawks have lost so many past battles over budgeting and appropriating, some now turn to more radical measures such as government shutdowns or the refusal to raise the debt limit.
Considered out of bounds and dangerous in the past, this device was used by House Republicans in 2011 after they had won 63 seats in the 2010 "Tea Party" election. Although they only controlled one chamber of Congress, their ambition was to seize control of fiscal policy from President Barack Obama. The standoff and threatened default brought on a sharp decline in the stock market and a downgrading of U.S. credit by the financial services giant Standard & Poor's.
Obama negotiated with House Republicans that year, eventually producing a new law called the Budget Control Act. Many Democrats now consider those negotiations a mistake, in part because they seemed to reward holding the debt limit hostage. That is one reason the Biden White House has so far refused negotiations on the debt limit.
In 2013, with control of Congress still split, Republicans threatened to block a debt limit increase unless Democrats agreed to restrain or repeal the Affordable Care Act (Obamacare). That effort because the Republican Speaker of the House John Boehner was not willing to risk default. Two years later, frustrated by his constant struggles with his troops, Boehner simply quit as speaker in mid-session.
How could this year's fight over the debt ceiling be different?
For now, the White House and the leaders of both parties in Congress continue to vow they will avoid default. But Republican leaders are saying they won't raise the limit until the White House and Democrats agree to negotiate deep cuts in the federal budget and substantial changes to the spending process. How deep? How substantial? Those would be among the questions to be answered.
But this is not a drill, and it is not just another repetition of a periodic exercise. For a variety of reasons, 2023 could be the year the dealmakers fail and we face the consequences long feared. There are pivotal figures within the Congress who seem to be working toward just this outcome as a policy goal.
The most recent episodes of controversy with the debt limit happened in 2021 and 2017. Both times, there were spirited objections to raising the limit. Some came from the opposition party, which was glad to make the majority uncomfortable as it did what had to be done. There were, as always, the protests from "deficit hawks" who regularly insist the government should "live within its means."
But both times, the party in office arranged to raise the limit as much as was necessary. Speeches were made and countless social media messages were posted. But in the end, in both cases, the onus of governing rested on one party. And that party was loath to be held responsible for default and so found means to break the impasse.
The situation now is quite different. We have a Democratic president and a nominally Democratic Senate arrayed against a narrowly Republican House dominated by a diehard faction.
Anyone who questions the determination of this newly energized hardcore in the House should review the 15 rounds of voting it took just to elect Kevin McCarthy as speaker this month. It was the longest such struggle since before the Civil War and McCarthy appears to have granted the holdouts an array of concessions on issues, procedures and committee assignments.
One of the things they seem bent on having is a showdown on the debt limit. One of their leading voices, Chip Roy of Texas, says "We believe there should ought to be specific, concrete limits on spending, attached to a debt ceiling increase."
Roy and others have said they want to achieve a balanced budget in 10 years using spending cuts. The Republican leadership has said it will not propose cuts to Medicare or Social Security and will not propose delaying military pay or payment on the federal debt. There is only limited support among Republicans for cutting defense spending in general.
So how much would all other aspects of the federal government be cut? According to the Urban-Brookings Tax Policy Center it would require $1.5 trillion in the first year and $14 trillion over the 10-year target period.
That kind of cutting is not the agenda of most Republicans, to be sure. But for some in the current Congress it is the profound redefinition of the federal government they ultimately want to achieve.
In past decades, that may have seemed a fantasy. Now, for some, it appears attainable. And that is why this latest round of confrontation over paying the nation's bills could lead, more than ever, to default.
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