How to end the US debt ceiling impasse

The writer is professor of economics and finance at Columbia University and was chairman of the US Council of Economic Advisers under President George W. Bush

To “hit the ceiling” is to be mad enough to be frustrated. Last week, Treasury Secretary Janet Yellen informed Congress and the public that the US Treasury, the world’s largest borrower, may be unable to meet all of the government’s spending obligations by June 1, leading to the first-ever default on Treasury debt. The danger has increased. , The culprit is the “debt ceiling”—that is, the amount the government has to periodically increase the allowable debt outstanding, a feature of US fiscal affairs since 1917.

The play has two parts – the superficial question of whether the debt ceiling will be raised to accommodate the borrowing that drives spending decisions (whether to pay our bills) and the underlying question of how to change the country’s shaky fiscal trajectory. (Is there to be an agreed upon framework for sound policy). Republicans have passed a bill allowing the debt ceiling to be raised, but with tougher conditions not acceptable to the Joe Biden administration. The President and Yellen have called for a “clean” expansion without any negotiations. A meeting between Biden and House Speaker Kevin McCarthy created little momentum.

From this emerging game of chicken to “What’s the debt limit?” From “they’ve always solved it, so they’ll do it again” to “it could get ugly”. OK, it might be ugly, but it’s not necessary. While the Biden administration is correct that a default would be a disaster for a blowback, a “no negotiation” stance makes any political bargaining very difficult. And while House Republicans passed a debt ceiling bill involving some reasonable spending changes (such as rolling back unused Covid outlays), the inclusion of a range of policies beyond this spending debate makes negotiations difficult.

Bringing long-term debt issues head-on by threatening default is catastrophic. Even that prospect looms large, raising the cost of debt not only for the federal government, but also for American states, businesses and households. Because such reasoning has irresponsible consequences, it is both a bad experiment and a weak negotiating position. That said, we cannot simply keep raising the debt limit without considering the underlying challenges. The nation is on a shaky financial path, exacerbating future pain.

There is a better way. Understanding the consequences of excessive federal deficits and debt is essential in building a consensus on action on spending and taxes. An agreed-upon fiscal framework can give Congress and the president targets for spending, the deficit, and the debt. In turn this can promote accountability by giving political actors and the media opportunities to criticize inaction.

Good advice on how to achieve this comes from the most unlikely of places. For conservatives in Congress, Sweden offers a way forward. In response to its own fiscal crisis in the 1990s, Sweden introduced a medium-term budgeting process beyond the annual budget – with debt targets and limits on expenditure. The Swedish Fiscal Policy Council provides an independent assessment of fiscal stability, which is visible to the public and to which the government must respond.

A decade ago, Tim Kane and I proposed a spending cap tied to the long-term average (adjusted for inflation) of federal revenue for the US, allowing Congress to reduce spending or raise taxes if large deficits persist. The action had started. Congress could override it only with a majority. The exact mechanism is less important than Sweden’s intuition that a long-term fiscal framework and direct accountability are needed. Such a system separates concerns loan from the point of debt ceiling, Adhering to the budget framework allows for clear future increases in the debt limit, as long as the framework is in place. This would be an advance on our current stand-off and adding near-term spending restraint is a win for McCarthy.

For Progressives? Good advice comes from here. , , Joe Biden. In the 1970s, then-Senator Biden introduced a bill that would have limited budget authority for all federal programs for between four and six years. He also supported the cut in Social Security benefits as part of the 1983 reforms. The point is not that the focus should be on Social Security or that any framework is perfect, but that a forward-looking goal for spending and borrowing with accountability is important. Moving forward with an increase in the debt ceiling within the budget framework offers a win-win for Biden.

Consider the options. Tampering with a default would lead to an immediate, costly drop in stock prices and confidence in an already faltering economy. (See Memo to Congress and the White House: Market Reactions to the Initial Failure to Approve the Troubled Asset Relief Program for Banks at the Beginning of the 2008 Financial Crisis.) And with no framework in place for fiscal stability The only thing is to accept the increase in the credit limit. A recipe for unnecessary future pain. As the late economist Herb Stein once said, “If something can’t go on forever, it will stop.”

The writer is professor of economics and finance at Columbia University and was chairman of the US Council of Economic Advisers under President George W. Bush

To “hit the ceiling” is to be mad enough to be frustrated. Last week, Treasury Secretary Janet Yellen informed Congress and the public that the US Treasury, the world’s largest borrower, may be unable to meet all of the government’s spending obligations by June 1, leading to the first-ever default on Treasury debt. The danger has increased. , The culprit is the “debt ceiling”—that is, the amount the government has to periodically increase the allowable debt outstanding, a feature of US fiscal affairs since 1917.

The play has two parts – the superficial question of whether the debt ceiling will be raised to accommodate the borrowing that drives spending decisions (whether to pay our bills) and the underlying question of how to change the country’s shaky fiscal trajectory. (Is there to be an agreed upon framework for sound policy). Republicans have passed a bill allowing the debt ceiling to be raised, but with tougher conditions not acceptable to the Joe Biden administration. The President and Yellen have called for a “clean” expansion without any negotiations. A meeting between Biden and House Speaker Kevin McCarthy created little momentum.

From this emerging game of chicken to “What’s the debt limit?” From “they’ve always solved it, so they’ll do it again” to “it could get ugly”. OK, it might be ugly, but it’s not necessary. While the Biden administration is correct that a default would be a disaster for a blowback, a “no negotiation” stance makes any political bargaining very difficult. And while House Republicans passed a debt ceiling bill involving some reasonable spending changes (such as rolling back unused Covid outlays), the inclusion of a range of policies beyond this spending debate makes negotiations difficult.

Bringing long-term debt issues head-on by threatening default is catastrophic. Even that prospect looms large, raising the cost of debt not only for the federal government, but also for American states, businesses and households. Because such reasoning has irresponsible consequences, it is both a bad experiment and a weak negotiating position. That said, we cannot simply keep raising the debt limit without considering the underlying challenges. The nation is on a shaky financial path, exacerbating future pain.

There is a better way. Understanding the consequences of excessive federal deficits and debt is essential in building a consensus on action on spending and taxes. An agreed-upon fiscal framework can give Congress and the president targets for spending, the deficit, and the debt. In turn this can promote accountability by giving political actors and the media opportunities to criticize inaction.

Good advice on how to achieve this comes from the most unlikely of places. For conservatives in Congress, Sweden offers a way forward. In response to its own fiscal crisis in the 1990s, Sweden introduced a medium-term budgeting process beyond the annual budget – with debt targets and limits on expenditure. The Swedish Fiscal Policy Council provides an independent assessment of fiscal stability, which is visible to the public and to which the government must respond.

A decade ago, Tim Kane and I proposed a spending cap tied to the long-term average (adjusted for inflation) of federal revenue for the US, allowing Congress to reduce spending or raise taxes if large deficits persist. The action had started. Congress could override it only with a majority. The exact mechanism is less important than Sweden’s intuition that a long-term fiscal framework and direct accountability are needed. Such a system separates concerns loan from the point of debt ceiling, Adhering to the budget framework allows for clear future increases in the debt limit, as long as the framework is in place. This would be an advance on our current stand-off and adding near-term spending restraint is a win for McCarthy.

For Progressives? Good advice comes from here. , , Joe Biden. In the 1970s, then-Senator Biden introduced a bill that would have limited budget authority for all federal programs for between four and six years. He also supported the cut in Social Security benefits as part of the 1983 reforms. The point is not that the focus should be on Social Security or that any framework is perfect, but that a forward-looking goal for spending and borrowing with accountability is important. Moving forward with an increase in the debt ceiling within the budget framework offers a win-win for Biden.

Consider the options. Tampering with a default would lead to an immediate, costly drop in stock prices and confidence in an already faltering economy. (See Memo to Congress and the White House: Market Reactions to the Initial Failure to Approve the Troubled Asset Relief Program for Banks at the Beginning of the 2008 Financial Crisis.) And with no framework in place for fiscal stability The only thing is to accept the increase in the credit limit. A recipe for unnecessary future pain. As the late economist Herb Stein once said, “If something can’t go on forever, it will stop.”