The recurring debt ceiling ‘crisis’

By Dr. Harold A. Black

We have again reached another so-called budgetary crisis where the Federal debt ceiling must rise or else risk the possibility of the government defaulting on its debt payments. The ceiling currently sits at $31.4 trillion and must rise because the government continuously spends more than it receives in tax revenue. Failing to raise the ceiling means that the government could not pay all of its obligations and would have to delay or renege on some of its debts. Currently, the House in Republican hands is threatening not to raise the ceiling unless Biden agrees to some spending cuts and shifts in spending. Biden of course refuses. We have seen this Kabuki theatre before with its elaborate preening and false displays prior to raising the ceiling. The Republicans want their voters to think that they are actually trying to curtail spending while the Democrats want their voters to think that no cuts will be forthcoming – unless they are to the military. Both obviously are not being forthcoming because neither party is serious about cutting Federal spending. They want to grow spending on their priorities and not on the priorities of their adversaries while ever-growing overall Federal spending.

The debt ceiling has been around since World War I and has always been raised when it has been reached. It doesn’t matter who sits in the White House, the ceiling gets raised. The only difference is that when the Republicans are in office, the Democrats object to raising the ceiling and when the Democrats are in office, the Republicans object. It’s all a game. Who said, “My vote against the debt limit increase cannot change the fact that we have incurred this debt already, and will no doubt incur more?” The answer is Senator Joe Biden who voted against raising the ceiling in 2006. Biden also voted against raising the ceiling two times before. Now of course the same Biden is accusing the Republicans of playing partisan games by holding the debt ceiling hostage – just like he did on three different occasions when he was senator. Of course, he is right. Both parties avail themselves of the opportunity of playing before the cameras while not being the least bit serious about controlling government spending overall.

The government always threatens a “shutdown” in case the ceiling is not raised. I think the last so-called shutdown was in 2019. Then the government picked those items to shut down, which affected the public directly, like closing the national parks and furloughing “non-essential personnel.” Entitlements continued to be paid, the military and Congress got paid, air controllers, law enforcement got paid and the mail got delivered. The shutdowns were brief, lest the public realized that they really don’t miss most of the non-essential government. Also, the non-essential workers got paid vacations since they were all given back pay.

Much of the doom and gloom that comes out of Washington during times of a threatened shutdown is simply theatre. Instead of the Treasury trying to inflict the most pain on the public in order to pressure Congress to raise the ceiling – which it will do anyway – there are other options. The first concerns the paying of interest on the debt. Government agencies hold about $7 trillion of the debt and the Federal Reserve holds another $6 trillion. The government could just defer paying interest on this debt while paying the interest on the debt to all other holders. Even in a worst-case scenario, the US Treasury can always rely on the Federal Reserve to supply the funds necessary to fund its spending.  Therefore, the US government can be thought of as a contingent currency issuer who can issue the funds to spend.

So in the end, the debt ceiling will be raised and the main driver of the debt, entitlement spending, will continue to grow unconstrained. I can guarantee that any agreement on the budget will not address entitlement spending and until it does, both Democrats and Republicans will continue to play this silly game of chicken as each successive debt ceiling is reached.