Every few years it seems that another argument erupts over raising the national debt ceiling. So, let’s explore this oft-misunderstood macroeconomic metric. According to the Treasury Department, the Debt Limit (ceiling) “is the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments.” These “existing legal obligations” were incurred during past administrations of both parties. They were duly enacted by Congress and signed into law by the president at the time. A commonly misunderstood aspect of the debt limit is that raising it somehow gives the government in power a “blank check” to spend as much money as they wish on their pet projects. But nothing could be further from the truth. Let me be specific, authorizing an increase in the debt ceiling does NOT give a green light to whichever political party is in charge to spend taxpayers’ money on whatever their new pet projects happen to be.
The patrician rhetoric claiming that increasing the debt limit will give the other party a “blank check” to spend taxpayers’ money on their particular favorite policies is not only a lie, it is dangerous lie. It is dangerous because the alternative to increasing or suspending the debt limit would be disastrous for the nation. If the federal government defaults on paying its bills, especially its interest payments, the result on the U.S. economy would be catastrophic. According to Moody’s Analytics, default on the federal debt would wipe out some 6 million American jobs, cut stock-prices by a third, and reduce household wealth by $15 trillion. That is what a catastrophe looks like.
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Now, if you think I am crying “wolf,” think back to when the Republicans played chicken with the debt ceiling during Obama’s administration. You may recall that even though the Republicans came around and eventually approved the increase in the debt ceiling at the last minute, the consequences of their folly were rather expensive for us all. For the first time in history, on Aug. 8, 2011, Standard and Poor’s reduced the credit rating of the U.S. government from its highest rating of AAA to AA+ because, according to S&P, the "effectiveness, stability, and predictability" of American policymaking and political institutions had weakened at a time of ongoing challenges. All three major U.S. stock indexes declined between 5 and 7 percent that day.
Today, we are hearing many of the same types of patrician rhetoric that we heard in 2011. For example, in a recent email, Rep. Hinson (IA-01) proudly proclaims, “I'm not going to write them [Democrats] a blank check to keep spending on socialist policies.” Note how Ms. Hinnson distorts the truth about the debt limit. It is NOT true that suspending the debt limit will give Democrats “a blank check to keep spending on socialist policies.” The truth is that suspending the debt limit must be done to pay for past obligations already approved by both political parties. The debt limit must be raised, not only to pay for the Trump tax cuts but also to make Social Security payments; not only to pay the salaries of all government employees including the military but also to pay all of the obligations already incurred by the federal government.
Raising the debt ceiling has almost never been a patrician issue, like the Republicans have made it during the past two Democratic administrations. It has been raised or suspended over 100 times with barely a peep, since being established in 1917, for a very good reason. The Democrats voted with the Republicans to increase the debt ceiling multiple times during the Trump administration for good reason. The government wants to protect its full faith and credit. It is logical for it to do so. So, why would Republicans want to risk another lowering of the nation’s S&P credit rating just to give them some rhetoric to make the Democrats look bad? They should be more careful. Their plan will backfire.
Hans Isakson is a professor emeritus of economics who has published over 40 articles in various economic journals. He lives in Cedar Falls.