The Dumbest Hostage Situation
Our peculiar institutions and a statute brings us these debt ceiling standoffs.
If you follow the news, you’re going to start hearing a lot more about the debt ceiling in the next few weeks. Please keep in mind that the whole thing is uncommon, unnecessary, unproductive, and above all, mind-numbingly stupid.
A Primer on the Debt Ceiling
The national debt is every debt the federal government has accumulated and not yet paid off. If you’ve seen Hamilton, the first big jump in federal debt was when Lin-Manuel Miranda Alexander Hamilton convinced George Washington and Congress to assume the debts the states racked up in the Revolutionary War.
Every year that we run a budget deficit, the debt goes up. Right now, the national debt is about $31.5 trillion. That’s about as many stars as 315 Milky Way galaxies. So, you could say we are dealing with a large number.
The US federal government is not allowed to issue debt over a dollar amount set in a law titled “Public Debt Limit.” That statute, 31 U.S.C. § 3101(b), is commonly known as the debt ceiling. Congress has raised it nearly 100 times since the end of the Second World War. Congress most recently raised the debt ceiling in December 2021. It has also temporarily suspended the debt ceiling five times. The Constitution does not require a debt ceiling. In fact, the debt ceiling statute didn’t exist until 1917. Breaching the debt ceiling is bad—really bad—because it means the US government is defaulting on its debts. We must avoid doing that.
Having a debt ceiling at all is (almost) unique.
The only other developed country to have a debt ceiling like ours is Denmark. But, theirs is set at such a high level that they basically never have to think about it and there’s no political impact. Australia had one for a few years around the 2008 crash, but quickly scrapped it when it didn’t constrain government debt or spending, and it just became a negotiating weapon like in the US. A few countries (plus the European Union, for its member states) have debt “brakes” not as a set amount of their currency, but as a percent of the total economy (its gross domestic product, or GDP). Breaching these debt limits generally do not risk an imminent default like ours does, and they have been suspended during the pandemic and other economic emergencies. The consequences are fairly mild, at least at first. It’s also hard to measure exactly when a limit has been breached since measuring GDP is inexact and delayed.
But the vast majority of countries have nothing of the kind. In those places, the national government might run deficits and accumulate debt, but the absence of a debt limit itself causes no crisis. Some of those countries have higher debts than ours, but most of them are lower.
Divided government leads to brinksmanship.
The US has had four major debt ceiling standoffs in my lifetime: 1995, 2011, 2013, and now 2023. We have also had six government shutdowns (when there is no enacted budget), which were also more or less about deficits and debt: 1990, 1995, 1995-96, 2013, 2018, and 2018-19. All but one of those crises has happened during a period of divided government.1 That’s when one party holds the White House and the other party holds one or both chambers of Congress.
Divided government makes gridlock and standoffs much more likely. In the debt ceiling context, it makes an actual debt default—and the ensuing economic catastrophe—much more likely too. Let me explain by way of an analogy.
Say you’re going out to dinner with two friends, and any one of you can reject a restaurant suggestion. It’s more likely your group will have a harder time picking a place than if there were just two people going, or if you just grabbed some food by yourself. That’s what the federal government has going on with a president, a House of Representatives, and a Senate. If any one of them reject a debt ceiling bill (or any other bill), then there’s going to be fighting or gridlock. Then, imagine one or both of your friends have some reason why they don’t want to compromise with you. Maybe you picked the restaurant last time, they’re mad at you about something else, they hate patios, they’re allergic to fish—who knows, just stay with me. It’s going to be really hard to pick a place to eat, and they don’t sound very fun. This is what we get in the political system when we throw in intense ideological polarization, cable news, social media, and TV ads in primary elections bashing compromise. Finally, imagine one of your friends has to be really convinced that a restaurant idea is the best one. He can’t just be OK with the idea, he has to love it, or else he says no. This is our friend the Senate, where basically all bills require a 60-vote supermajority to overcome a filibuster. These friends sound exhausting!
This is essentially what we have with Joe Biden, Chuck Schumer, and Kevin McCarthy now. But the stakes are a lot higher than picking between sushi or pizza.
Of course, we are not the only country where government spending and debt is a divisive political issue. It’s an issue in every democratic country, and that’s fine. Let’s look at how places without debt ceilings deal with national debts.
Debt ceiling ≠ fiscal discipline
If a country doesn’t have a debt ceiling, that doesn’t mean its government pursues infinite debt and refuses to pay for anything. They monitor the overall debt amount, sure, but also things like the debt-to-GDP ratio, cost of borrowing (i.e., interest on the debt), inflation, and the like. They just don’t need a statute to tell them when debt has gotten too high. After all, the debt ceiling is an arbitrary number that by itself doesn’t mean anything. And they definitely don’t need a statute to trigger a default crisis.
So what actually forces politicians to care about government debt? As ever, it’s voters and markets. Let’s hop over to London for a minute.
In 1979, the UK had a general election for parliament. Conservative Party leader Margaret Thatcher railed against a recent bailout by the International Monetary Fund and the inflation Britain dealt with in the 1970s. Voters preferred her fiscal policies, the Conservatives beat the incumbent Labour Party, and Thatcher became prime minister. When she took office, UK national debt was about 40% of GDP; when she left office eleven years later, it was about half that. That’s a gross oversimplification, but the point is voters wanted a more fiscally conservative approach, and they voted in a government that did it. They didn’t have a debt ceiling.
Fast forward to 2022, still in the UK. Prime Minister Boris Johnson was forced out because of various scandals, and a new prime minister, Liz Truss, took his place. Truss tried to emulate Thatcher in the way she spoke and the way she dressed. But, as you’ll know, Truss failed spectacularly. She released a budget plan heavy on tax cuts and light on spending cuts, meaning that the budget deficit and national debt would explode. Investors lost confidence in the UK, leading to a run on the pound and a tremendous rise in yields on the bond market. That meant higher costs of imported goods (at a time of already–high inflation) and a higher cost to borrow. The national debt would have gotten too high, and the loss of investment was leading to a downward spiral. The markets revolted against Truss’s plans for the UK, and her party forced her out within weeks. She was famously outlasted by a head of lettuce. Her replacement, Rishi Sunak, has reversed Truss’s budget plans and calmed the markets. All this happened without a debt ceiling.
Here in the US, the situation is much different. Voters have not elected a president, a Senate, and arguably even a House that support large tax increases or steep spending cuts. The cost of borrowing and inflation are higher than the recent past and the bond market isn’t great, but confidence in the US government and the strength of the dollar remain quite high. Any debt crisis we have will be entirely due to political choice.
How to avoid these crises
There are four options to avoid a calamitous debt ceiling default:
The “Australia” Solution: repeal the debt ceiling statute, or at least permanently suspend it. Recognize that it doesn’t actually enforce fiscal discipline, but just becomes another thing for parties to bicker about and use as a weapon. Then, practice tighter fiscal responsibility if the voters and/or markets demand it.
The “Denmark” Solution: raise the ceiling so high that it’s never an issue again. Then, practice tighter fiscal responsibility if the voters and/or markets demand it.
The “Make America a Parliamentary Republic” Solution: remove divided government from the possible electoral outcomes by a) making the president a figurehead, b) drastically reducing the Senate’s power over legislation, and c) effectively turning the Speaker of the House or House Majority Leader into a prime minister. (Probably unlikely!) Then, practice tighter fiscal responsibility if the voters and/or markets demand it.
The “Do This Again in a Year” Solution: Biden and House Republicans cut a deal to raise the ceiling for a year, maybe even six months. Then, change little to nothing on the government’s fiscal practices and have another crisis when the time comes.
I’ll wager $31.5 trillion on #4.
Of the nine during divided government periods, seven happened with a Democratic president and at least one Republican-controlled chamber of Congress.