In the coming weeks, we’ll hear a lot about America’s debt ceiling, or borrowing limit.
Once again, Congress and the president will wrestle with whether and how to raise the nation’s borrowing limit and thus avoid America’s first-ever default on our official debt.
Playing games with our government debt — all the bills, notes and bonds issued by the U.S. government to fund operations and pay our bills — has become a great pastime in our nation’s capital.
Congress succeeded in “winning” a downgrade in U.S. debt by S&P rating agency when it flirted with default in 2011. Now America no longer boasts a AAA rating, the best there is.
And President Donald Trump recently threatened to shut down government and veto a bill raising the debt ceiling if it doesn’t contain (U.S. taxpayer) funds for his border wall with Mexico.
The mere risk of a government default would send stock and financial markets into gyrations, surely not a welcome gift anytime, but particularly not for a nation still struggling to recover fully from the ravages of the 2008 financial crisis and Great Recession.
An actual default would send shock waves through financial markets here and abroad and almost certainly pull the legs out from under our broader economy.
Although some politicians talk glibly about default, stiffing our creditors would put America in the dubious company of countries like Russia, Greece, Argentina, Pakistan, Ukraine, Ivory Coast, Moldova, Uruguay, Nicaragua, and Grenada — all of which have defaulted on their official debt in recent decades, some twice.
And because our economy, financial system and dollar are at the heart of the global economy, a default by America would hit other countries hard. It also would undermine investors’ trust in our debt, making it harder to raise funds and increasing the cost of the funds we do raise.
How did we get into this situation? And how can we get ourselves out of it?
Because spending authority is vested in the U.S. Congress under the Constitution, Congress must approve all spending by federal agencies and all borrowing necessary to fund U.S. government operations.
Prior to America’s entry into World War I, Congress voted on each issuance of debt as a separate piece of legislation. But in 1917, as large amounts of war bonds were issued, Congress moved to make the process more flexible and efficient by establishing a ceiling on how much debt could be issued before Congress would have to vote again. (Thanks to the nonpartisan Committee for a Responsible Federal Budget for this historical tidbit.)
Total government debt today is $19.85 trillion, or 104 percent of our economy. That figure represents the sum of all federal budget deficits amassed over the years, when we’ve borrowed to fill the gap between spending and receipts.
With the exception of the closing years of the Clinton administration, when the federal budget was in surplus, and in 1960, when the budget was in rough balance, the federal government has operated in deficit each year since World War II.
The current debt ceiling of $19.86 trillion means the Treasury Department has very little wiggle room until spending hits the ceiling and the government can’t pay all bills coming due.
Those bills run the gamut from military salaries and pensions; firefighting costs; Social Security, Medicare and Medicaid payments; to interest on outstanding debt. And that debt is held by pension funds, insurance companies, foreign governments, individual investors in U.S. Treasury savings bonds, and millions of other firms and individuals here and abroad seeking safe investments.
Not paying those bills — as politicians who advocate default effectively support — will do nothing to reduce future spending or reduce fiscal deficits. It will only ruin faith in America as a safe place to invest and hurt those people and firms not being paid.
It’s a bit as if a spendthrift couple is saddled with high credit card debts and decides the best way to fix their spending problem is to stop payments.
The math is simple.
The only way to slow the growth in government debt is to run smaller fiscal deficits, i.e., shrink the gap between spending and revenue.
The only way to actually reduce government debt is to run budget surpluses — spend less than we take in and pay down the debt.
Holding the debt ceiling hostage in the push for less spending has become a dangerous game of “chicken.”
It’s time for elected officials in both parties to return to the job of budgeting for our nation’s future in a responsible manner.
It’s called leadership.