The past week has seen a rare triumph of substance over politics in Washington. In testimony before the House Financial Services Committee, Treasury Secretary Janet Yellen spoke in favor of abolishing the debt ceiling. She is right: the debt ceiling deserves to be removed. This strange quirk of the US budget process is of no use except, from time to time, to let one side or the other seek political advantage by threatening to plunge the financial system into chaos. There’s never a good time to flirt with a financial crisis, but with the recovery still far from complete, now is a particularly bad time.
On Monday, President Joe Biden argued that Republicans should agree not to obstruct a bill to raise the cap, allowing Democrats to pass the measure by a simple majority. Republicans have said they will play no role in resolving the situation. Democrats do not want to go it alone, arguing that the other side should accept responsibility for obligations entered into earlier, and that there is no time for Democrats to do what is necessary without such cooperation.
If the Republicans refuse to budge, the Democrats will have to move forward on their own. Last week, the parliamentarian of the Senate confirmed that the ceiling could be raised thanks to the so-called reconciliation process. Time is running out and for this to work, Democrats will need to act quickly. Of course, going it alone will require them to pay the price; it is, however, perhaps the cheapest way out of the squeeze they find themselves in. To get the most out of this expense, they should abolish the cap rather than just reset it to a level that will cause this nightmare to repeat in a few years. from now on. If the obscure Senate rules or other considerations prevent them from abolishing it outright, they should raise it to stratospheric heights, making it disappear for a long time.
The policy arguments in favor of such a decision are clear. Congress and the President set federal government spending and tax policies. The Treasury cannot decide separately how much to borrow: this decision has already been made. Over the years, spending almost always exceeded revenue, and in order to finance the resulting deficits, the Treasury had to borrow. But periodically, this process goes against the legal limit on the debt that the Treasury can issue. Once the limit is reached, and the Treasury having exhausted various delaying tactics, the government will be forced to default.
The Treasury can borrow at the most preferential rates on the financial market, because no one has ever seriously questioned its ability to honor its obligations in full and on time. Through wars, financial crises and pandemics, the Treasury has always been true to its word. If this were no longer the case, investors would incorporate a risk premium into Treasury lending rates. For decades to come, future taxpayers will pay for today’s mistakes.
Some argue that a “partial” defect may not be so serious. Perhaps the Treasury could delay payments critical to the fight against COVID-19, or benefits to food stamp recipients, or air traffic controller salaries, while prioritizing payments to bondholders, thus preserving the Treasury’s position as a risk-free borrower. Sounds like a political winner? I don’t think so either.
The best argument for defending the debt ceiling is that it provides a periodic opportunity for fiscal discipline. As absurd as it may seem to prompt Congress to renege on its commitments, including long-standing ones, perhaps the debt ceiling interrupts the nation’s progress towards fiscal irresponsibility. Yet the record of ever-growing debt does little to support the theory. The right time to impose fiscal discipline is when the country is making its tax and spending choices.
Finally, you might think that periodic debt ceiling crises are just theater that no one needs to take seriously. The problem is that the threat of leaving the government by default would exert no force in political battles unless it at least had a hint of plausibility. True, the worst outcome could be improbable, but it is unacceptable that such a thing is even possible.
Moderate senators might be uncomfortable voting to either drop the cap or make it unnecessary by raising it to a wacky number. But if they have the courage to do so, they will have a great talking point: through their efforts, the financial future of the nation will be more secure. It should count for something. Whether they’re Tories, Liberals, or somewhere in between, voters should be happy that Congress has finally acted to stop the madness.
ABOUT THE WRITER
David Wilcox is director of economic research in the United States. From 2011 to 2018, he was director of the US Federal Reserve’s Research and Statistics Division and was senior advisor to three Fed chairmen. In the late 1990s, he served as Assistant Secretary to the Treasury for Economic Policy.
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