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America, I hope you enjoyed the political theater.
Because that’s what all the anguish over the debt ceiling amounted to. In the real world, relatively little has happened.
Congress had voted for public spending, but the outlays could only be covered by new borrowing, because tax revenues wouldn’t be sufficient. That would boost the national debt. But there is a ceiling on public debt that Congress mostly ignored.
Then, last November, the Republicans won a slim majority in the House of Representatives. The GOP right wing hoped it could use the debt ceiling as a way of reversing spending it had opposed and even some it had supported.
The GOP would take control of the House in January. Before then, President Joe Biden and the lame-duck Democrats could have put through a bill increasing the ceiling. He might have been forced to make concessions to conservative Democrats, but that would have been easier than dealing later with the Republican House majority. He did not take the opportunity.
Or he could have ignored the debt ceiling on the grounds that it is banned by the 14th Amendment to the U.S. Constitution. But Biden was worried that the matter would end up being resolved by the courts. Then, the House GOP passed its own budget-slashing version of a debt limit bill, and forced him to negotiate.
Failure to raise the debt limit supposedly meant that the federal government would not have enough money from taxes for its debt payments. It might default, the pundits warned. Interest rates would rise, their effect rippling through the economy. Government spending cutbacks would kill growth. Jobs would be lost, and the stock market would fall sharply, they warned.
Possibly the greatest harm would be to the role of the American dollar, the reserve currency widely used to finance world trade and investment. As other counties lost confidence in it, U.S. influence would decline.
The Treasury Department said federal income would no longer cover all the bills on June 5. Panic, hyped by the media, gradually appeared. Default loomed.
Only it didn’t. The Treasury receives enough money to pay debt service, though government spending would have to be cut or even halted. Social Security and Medicare had sufficient reserves to cover many more months of outlays.
Biden and House Speaker Kevin McCarthy engaged in desperate negotiations to avoid default. Each tried to attach blame for a possible default on the other. That was the essence of the negotiations. If there were a deal, each would need to declare victory.
They reached a deal to send to Congress, so both must have won. McCarthy got mostly symbolic caps and reductions from slightly lowering planned spending over the next two years, and Biden saved his major initiatives. Sensibly, unspent COVID relief dollars were recovered. The debt ceiling was lifted until after the 2024 elections.
Here’s an example of why not much happened. Biden and the Democratic Congress had passed $80 billion for the IRS over an eight-year period to collect unpaid taxes from the wealthiest taxpayers. The GOP falsely claimed that taxes would be raised on average people.
The two-year debt ceiling deal appears to cut this amount by $20 billion. The IRS has its plans in place. If necessary, it can shift money forward from future years and keep pursuing improved collection limited to people with incomes over $400,000. Nothing in the deal prevents Congress from restoring the full spending three or more years from now.
As for the dollar’s world role, it’s already waning and with it American prestige. “America First” policies, previous debt ceiling crises and the rise of China’s yuan have been reducing U.S. economic power.
Strong House GOP conservatives and many progressive Democrats don’t like the deal. The conservatives think McCarthy got too little and oppose it, knowing that passage does not need their votes. The progressives think Biden should have made no concessions. Few want responsibility for a default. In the end, both sides will enjoy the illusion of a political victory.
Can this situation be avoided in the future? The House once had a rule that whenever it passed a bill requiring debt to pay the cost, the debt ceiling would be automatically increased. The losers would not get a second bite of the apple through a later battle over the debt ceiling. That rule should be revived.
Congress should never spend money without deciding where it will come from. That principle is rarely observed, because it’s a lot easier simply to spend, while shielding voters from the cost.
Not all future spending has to come from driving the country deeper into debt, making new debt ceiling clashes and default a real possibility. When Congress increases spending, from adding military hardware to boosting renewable energy, it should exercise greater leadership and cover the costs by combining debt increases with tax increases.
Otherwise, it’s political theater.