The debt ceiling is an American political issue that ritualistically revives in the news, handled by politicians who dress the wound with provisional solutions, to the point where we consider minting a $1 trillion coin. I now revisit the topic, where I originally covered it over a year ago and explained some of the nuances related to government debt.
We once again quickly approach the debt ceiling and political drama ensuing. But, as always, after threatening the credit of the U.S. economy and startling markets, the ceiling will be increased once again. A “predictable ritual dance punctuated by brinkmanship, feigned righteousness and rank political maneuvering…in Shakespeare’s words, lots of ‘sound and fury signifying nothing,'” says Emil Henry, former assistant secretary of the Treasury.
A major contributor to the issue in spending legislation is redundancy in the debt ceiling budgeting process which ultimately settles on spending that surpasses the approved debt limit, which will not be funded until the limit is raised again.
Clearly, the debt ceiling debate must be resolved. Large government spending consistently reaches the ceiling and triggers government turmoil, additionally causing economic uncertainty it imposed on business, citizens and the international economic role of the United States, as indicated by the S&P’s 2011 U.S. sovereign debt downgrade. This debate is one of the many that engages in our demagoguery and virtue politics.
The Treasury announced that it will be undertaking extraordinary measures to ensure significant consequences will not be seen until June. Negotiations between House Republicans and the Biden administration have been ruled out relating to raising the debt ceiling in exchange for cutting spending. So what other options do we have? Some ideas, maybe not entirely practical, have been tossed around which are technically possible, like minting a $1 trillion coin, selling federal land, or invoking the 14th amendment, but have doubtful resolve.
The most pragmatic solution, however, would be to remove the debt ceiling completely. There is an apparent contradiction within our spending laws. When Congress passes spending laws, the White House has no option to proceed to avoid violating spending laws. A paper from Columbia Law Review analyzes the “trilemma” the president would have to face in a worst case scenario where all possible options can be deemed unconstitutional.
“There is very clearly a conflict between the debt ceiling on the one hand and the law that is the federal budget itself on the other hand,” said Bob Hockett, a former Federal Reserve official and congressional economic policy adviser who teaches public finance at Cornell and Georgetown. “People seem to forget that the federal budget is itself a legally effective enactment. Budgets are legal requirements that Congress duly passes, and our legal system has a wealth of interpretive principles for resolving conflicts between various applications of laws, which in this case preempt the debt ceiling.”
Treasury Secretary Janet Yellen is most vocal on the issue, in a recent letter urging for political action among lawmakers. Defaulting on the debt guarantees an economic recession and will cause “irreparable harm to the U.S. economy”. With the current disorder in Congress, it is increasingly more legitimate to consider moving economic power out of Capitol Hill and towards the Treasury and other financial entities, while things like budgeting stays out of the House and can be managed externally.
The debt ceiling will certainly be important for 2024. Especially in regards to inflation and the large spending recently. Republicans continue to dig their feet in their anti-government spending position and threaten the U.S. economy for election results, something Democrats are guilty of as well. Simply, there must be stronger legal safeguards to prevent politicians weaponizing the economy.
A $1 trillion coin, though an amusing solution, only goes as far as a gimmick. The U.S. needs systemic economic legal reform, and until meaningful reform is introduced, the economy is at the mercy of political posturing.