Debt Ceiling Debate: Crisis?

Originally disseminated in May, 2023 

Introduction 
The Deficit.  The debt ceiling.  Spending cuts.  Default.  The news out of Washington has been on a slow boil of worry that our political leaders will lead us over a financial cliff for the sake of partisan ideologies – each side blaming the other.  In the midst of this all, it’s possible that some of you are unclear on the actual issues being discussed.  And what if, miracle of miracles, the polarized factions in DC actually work together to form a compromise we can all live with?  Let’s consider. 

The Debt Ceiling Debate:  Crisis?   
The showdown between Dems and the GOP over the need to increase debt or cut spending has been framed these days in terms of the worst case scenario: “If the US government were to default on its obligations…”  And yes, should we default, the outcomes would be unacceptably terrible – so terrible in fact, that they may not even be plausible.  As with Cold War geopolitics, mutually assured destruction, though terrifying, can force bitter adversaries to come together and negotiate.  In the end, that is what we want, isn’t it?  We want the warring tribes in Washington to actually sit down and talk, like responsible grownups with common interests despite conflicting world views.  With all of the mistrust out there, I fear that many people are focused on the politics of this debt ceiling debate, and may not fully understand the basics of the deficit, debt, and where we can all agree.  Let’s review the big topics. 

What is The Deficit?   
The phrase Federal Deficit comes up a lot.  In a nutshell, what this actually means is: most every year since the 1970s the US government has spent more than it takes in from taxes and other income sources.  This excess of spending over income is the Federal Deficit.  It’s like a massive annual overdraft protection.  And the cumulative total of each year’s Federal Deficit is the Federal Debt.  The amount of the Deficit and Federal Debt are so staggeringly huge, they’re almost inconceivable (we’re talking tens of trillions).  A growing portion of the US government’s budget must go towards servicing this debt, or in other words paying back what was borrowed. 

The Debt Ceiling.   
Politicians love to spend on programs that help their constituents.  It’s almost a truism that they spend more than what is taken in through various taxes and other incomes.  When our government spends more than it takes in, the shortfall is generally covered by borrowing, mostly in the form of issuing bonds (i.e., US Treasuries).  It’s like a household constantly living off of bank overdraft protection.  Over the years, legislators have instituted limits to try and control this ever growing debt load.  These limits are called debt ceilings, where Congress has to vote to approve further borrowing, or cut spending.  Theoretically, there is a limit to how long this can go on.  Other countries have gone bankrupt through such behavior.  But the US is so big and growing enough, that there is a sense that we don’t have to worry about spending too much… yet.  If we ever reach a point where the Federal Debt got too big to manage, the burden on the US would be devastating. 

Alternatives to Default.   
In practice, if they can’t come to agreement in Washington this year, there wouldn’t be a singular moment when financial disaster is realized.  Rather, there would be steps that the government (Federal agencies, the Treasury, and the Fed) could take to delay the crisis. 

• Partial shutdown.  This has been done before.  Nonessential workers could be furloughed.  Lower priority programs could be postponed.   
• Monetize the deficit.  The Fed could simply buy Treasuries to issue cash to pay for programs.  This is inflationary, and Powell has stated he really loathes this option. 
• Selective delays.  Like partial shutdowns, the government could prioritize all of the millions of payments it owes, trying to stay current with the most important ones and delaying the ones deemed less important.   
• Balanced Budget.  A purist might wish for a balanced budget each year in which all expenditures are covered by taxes and revenues.  This would completely resolve this whole problem, but seems like the remotest of possibilities.  Neither party has shown any ability to restrain themselves.  Perpetual sailor-on-shore-leave spending seems unsustainable, no? 

Long-Term Solution Needed.   
The delaying tactics described above are just that: delays.  These are not permanent solutions.  While some may disagree, in my view it is vital that we must find a way to reduce and even eliminate our annual deficit.  If we can’t or won’t, then we will one day, in the future (who knows how distant) have a Federal Debt so large that servicing it is unsustainable and the result would be a dramatic negative impact on our standard of living. 

Conclusion: Debate is Good.   
The debate going on in Washington is a good thing!  In these times so commonly described as dysfunctional and polarized, we want our political leaders to remember how to talk to one another on our behalf.  And for now, the White House and Congress are having conversations.  Imagine!  We citizens need them to meet, talk, and figure out some sort of compromise in which everyone gets maybe a little less than they wanted, but can live with the decision.  And maybe come up with an agreement to live within our budget.   

We aren’t out of the woods yet.  The negotiations in Washington will probably have to take a turn toward the absurd before the final resolution is complete.  But the fact that they are still talking is very good news and seems almost, dare I say, functional.  Will this constructive progress continue?  Everyone hopes so. 

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