Reasons to Hate the Debt Ceiling

Battles over the debt ceiling cripple the economy

As of this writing (November 21, 2022), Republicans are poised to take over the House of Representatives next year, and one of the weapons they are expected to use to scare people with is the federal debt ceiling.  If the debt ceiling is not raised, all sorts of economic havoc could result, based on the failure of the government to pay its bills, and even go into default after a short lag time.  A default would send shock waves throughout the global economy, and make the U.S.—both government and the private sector—a less desirable entity to do business with.

Just the threat of a default makes other countries jittery—when, they ask themselves, will the U.S. actually default because of political wrangling?  Recurring battles over the debt ceiling weaken our position versus the developing BRICS countries (Brazil, Russia, India, China, and South Africa) as well as established economies in the West.

What seems scary about the “national debt” and deficit spending

The “national debt” consists principally of the total of all the Treasury bonds, Treasury bills, and Treasury notes held by entities such as yourself, if you happen to hold a U.S. savings bond, as well as by the U.S. government itself. Currently the breakdown among all bondholders is about 36% held by American individuals and companies, 39% held by the U.S. federal government (used for such things as the Social Security Trust Fund, Medicare, and federal pensions) and 25% held by foreign investors such as China and Japan. The latter proportion strongly suggests that the U.S. government cannot be “held hostage” by foreign bond holders.

Your investment is a loan made to the government. From your point of view, a U.S. savings bond is an investment. But it is also a loan made to the government, which is why it becomes part of the national debt.

These bonds get paid for largely by federal taxes such as the income tax. Therefore, another way of looking at the debt is to total all the money the U.S. has ever spent minus all the taxes the U.S. government has ever collected. Right now that number is about $28 trillion—about $100,000 for every man, woman, and child in the United States.

Yow! $100,000 per capita? How can we ever pay it back? If we raise the debt ceiling, allowing the government to spend even more and issue even more bonds, our children and their children, and their children will end up having to pay down this gigantic amount, sending most Americans into bankruptcy.

That’s the scary tale conservatives like Mitt Romney want you to believe. That’s why fierce battles over the debt ceiling recur periodically, because the public has been duped into thinking that the budget has to be balanced—i.e., taxes have to keep pace with spending.  This is the weapon that politicians—usually Republicans—wield to keep a lid on social programs such as the child tax credit.

Note that when it comes to defense spending and tax cuts for the rich, Republicans don’t seem to think that the debt is much of a problem, and are happy to raise the debt ceiling, just as they did three times during the Trump administration. The reason is . . .

The scary tale just isn’t real.

The fact is that the $28 trillion in “debt” has already been paid into the real economy in the form of government spending.

Look at it this way: suppose you pay $10,000 in taxes. The government keeps $9,000 of it and puts the remaining $1,000 out into the real economy for such things as roads and bridges and the military and social programs and the National Weather Service, medical research,  etc.  This is called “deficit spending” and is at odds with the “balanced budget” that has become an obsession with conservatives who do their damnedest to make it an obsession with you, also.

The $1,000 is a transfer of taxpayer money (from taxes and bond purchases) into whatever the government chooses to spend it on in the nongovernment economy—what we are calling the “real” economy. The argument about spending should be not about an arbitrary “debt ceiling,”  but about what it is spent on.  When Republicans anticipate that transfers are going to programs they don’t like—such as climate change mitigation—they don’t have to come up with justifications for halting or curtailing them, they simply call on the debt ceiling to cap spending.

The transfers most loathed by the political Right are “entitlements”—government-funded mandatory programs like Social Security which form the federal safety net.  The Right keeps pounding a steady drumbeat of doom that the Social Security is destined to “go broke” in a certain number of years, since Social Security (FICA) taxes are not keeping up with benefits. They do have a point: as life expectancy lengthens, years of retirement past a set age have increased the population of the elderly faster than the increase in Americans of working age.  If benefits to the elderly are increased to keep up with the cost of living and the Social Security tax paid by working people does not increase, then payments into the Social Security Fund will fail to keep pace with payments out, until the Fund runs dry. Since tax increases are anathema to conservatives, they are pushing for three remedies: (1) raise the retirement age; (2) prevent benefits from rising along with the cost of living; (3) the nuclear option: take the program out of the government’s hands altogether and place it in the hands of private businesses. None of these remedies are really necessary, because . . .

The U.S. Government can always pay its bills because it has a sovereign (“fiat”) currency

You don’t have to worry about your bond getting paid off, or Social Security benefits being terminated, because the U.S. has a sovereign currency, which is not tied to holdings of commodities such as gold.  The U.S. went off the gold standard in domestic finance  in 1933, and in international finance in 1971.  For a brief explanation of why this was necessary in order to stabilize the global economy, read “Here’s Why the U.S. No Longer Follows a Gold Standard.”

The government can generate as much money as it wants to pay for whatever it wants. The constraint that needs attention is not a debt ceiling, but inflation—when too many dollars are demanding more than the productive capacity of goods and services can supply.

To be sure, the current spike in inflation is driven partly by high COVID stimulus spending, but also by a sluggish return of productive capacity due to supply chain disruptions, a severe slowdown in the Chinese economy (caused in great part by their “zero-COVID policy”), people not returning to work and/or getting higher wages,  and other pandemic impacts such as health care workers quitting in droves. Add the Ukraine War, and heavy profit-taking by corporations, and you have a prescription for global inflation, which is just what has occurred.

In hindsight, one could argue that three rounds of large federal stimulus in 2021 and 2022 carried too great a risk of inflation; the counterargument was that insufficient stimulus would have been worse, resulting in job losses and a recession. In support of the counterargument, we now have low unemployment and the most rapid wage growth among the developed economies. Ironically, we may now be on the brink of a recession from another source, as the Fed’s failure to ramp up interest rates slowly in late 2021 and early 2022, has resulted in four straight increases of 0.75% (75 so-called “basis points”) since June.

For a more complete treatment of how the “national debt” and “balanced budgets” keep a tight lid on progressive spending, see “The Fix for the Economy You Never Hear About”