Last week the U.S. reached its borrowing limit of $31.4 trillion. The debt limit is the maximum amount of debt that the Treasury Department can issue. Given that the federal government runs large budget deficits, if the Treasury Department cannot pay its obligations, the negative consequences will quickly mount and risk triggering a deep recession.
The Treasury Department said it will take “extraordinary measures” to make certain that the government’s bills are fully paid through early June. A cornerstone of the U.S. economy and global financial system is that the U.S. government pays what it owes in a timely way.
In 1917, during World War I, Congress created the debt ceiling, which allowed the Treasury to issue bonds and take on other debt without specific Congressional approval, as long as the total debt fell under the statutory debt ceiling. The intent of the debt limit was to force lawmakers to be fiscally disciplined — to spend less, tax more, and rein in budget deficits and the debt.
If the federal government fails to pay all of its obligations, Mark Zandi, chief economist for Moody’s Analytics, estimated the U.S. would lose 6 million jobs, $12 trillion in household wealth and 4% of gross domestic product (GDP). He predicted that the unemployment rate would rise to at least 7%, up from the December 2022 rate of 3.5%. Zandi wrote, “if lawmakers do not reverse course and the impasse drags on even a few weeks, the hit to the economy would be cataclysmic.”
Suzanne Clark, CEO of the U.S. Chamber of Commerce, urged lawmakers not to “play chicken with the true faith and credit of the United States.” She pointed out that “raising the debt limit is not about new spending, it is about paying for previous choices policymakers legislated.”
Unfortunately, we are on a dangerous fiscal course. According to the Committee for a Responsible Federal Budget, the annual budget deficit will increase to $2.4 trillion by 2032. The U.S. is on a path to add more than $17 trillion to the national debt over the next decade. Interest payments on the debt will double from 1.7% to 3.4% of GDP. Currently, about one-third of our federal debt is held by foreigners. The Chinese hold more than $1 trillion.
To avoid a government shutdown, Republicans will need to work with the Democratic-led Senate to raise the debt ceiling and to pass appropriation bills. Currently, the Republicans lack a plan on spending cuts. While they want to see spending slashed to lower the federal deficit, no approach has won broad support.
U.S. debt has accelerated since 2001, growing by more than 28 trillion. Our increased borrowing could ultimately undermine our economy and global leadership.
There is an enormous amount of uncertainty surrounding the speed and magnitude of the damage the U.S. economy will incur if we are unable to pay our bills on time. It depends on how long the situation lasts, how it is managed, and the extent to which investors alter their views about the safety of U.S. Treasuries. An extended impasse is likely to cause significant damage to the U.S. economy.
In order to resolve our impending crisis, both political parties must back away from their untenable positions. The Republicans must repudiate their use of the debt ceiling as a negotiating tactic. The Biden administration must abandon its refusal to negotiate.
It remains unclear how lawmakers will resolve this impasse. Given the severe economic and political costs of failing to pay our bills promptly, the most likely path is for lawmakers to reach a settlement. However, odds that we do not reach an agreement before breaching the debt limit are meaningfully greater than zero.
Originally published in the Sarasota Herald-Tribune
