THE ECONOMIST: Here we go again!

Congress should fix the debt ceiling once and for all—but it won’t!

As the Treasury Department defines it, the “debt limit is the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations…” In the early years, Congress approved individual debt issues as they came up (the US government first went into debt in 1783, six years before the Constitution was adopted). That all changed during World War I, when a “temporary” limit was set to allow flexibility for emergencies. Let the games begin!!

Treasury Secretary Janet Yellen recently notified Congress that the outstanding debt of the United States is projected to reach the limit this week. In response, the Treasury will begin to take “extraordinary measures” to prevent a default. These measures are essentially accounting maneuvers like suspending payments into federal employee pension funds (which will be made up later). These shenanigans will likely get us to about June. Something needs to be done long before that.

It’s impossible to overstate the chaos that would ensue if the debt limit were breached. There would be catastrophic economic consequences. A global financial meltdown would occur, and recovery would be difficult. US government debt defines the “risk free” standard and underpins world markets; the implications of a default would be devastating. Economic and financial life would literally never be the same—like an economic pandemic!

Congress has always raised the debt limit—78 times since 1960 (most recently in December 2021). There are often inflammatory threats thrown around, but even a dysfunctional Congress ultimately realizes that the potential fallout is not to be trifled with, and a higher ceiling is implemented. The rhetoric is more heated this time, but the consequences remain the same.

One analogy echoing through the halls of Congress these days is that raising the debt ceiling is like increasing your kid’s credit card limit and therefore never discouraging overspending. There are two problems with this comparison. First, it’s not their kid—it’s them! Congress is responsible for the outlays that have been authorized, not anyone else. Second, the debt covers PAST decisions, not FUTURE ones. Raising the ceiling simply allows the Treasury Department to pay CURRENT legal obligations.

Clearly, fiscal responsibility is desperately needed in Washington. The time for progress, however, is during the budget process. Careful analysis of both spending and revenue and meaningful efforts to bring the two in line is the only viable path to better outcomes. Once you have spent the money, you must pay the tab. For now, let’s hope that the theater we are witnessing doesn’t morph from mildly amusing comedy to tragedy of epic proportions. Stay safe!