Alarm and frustration grow by the day over the debt-ceiling stalemate gripping Washington. On the line: American living standards, family budgets, and stability in the global financial system.
In theory, the debt ceiling should act as a fiscal restraint during the budgeting process. But after near meltdowns in 2011, 2013 and again today, many argue it’s time to take the political football off the field. The time for tax and spending choices by Congress is through the normal course of business. Deciding later not to pay the bills by not raising the debt ceiling is not sound fiscal policy.
Treasury Secretary Janet Yellen, a Democrat, has testified to Congress she would like it gone.
Federal Reserve Chairman Jerome Powell, a Republican, has said the debt ceiling is counterproductive.
And the CEO of the nation’s biggest bank, JPMorgan Chase’s Jamie Dimon turns visibly frustrated at the subject of the debt ceiling. He reiterated last week to Bloomberg News, “I would love to get rid of the debt ceiling.”
“There was I think reasonably good intent, you know, when this was first put on the books over 100 years ago to force lawmakers to come together and figure out how to make sure that the government’s fiscal situation is on sound ground, but that’s not what’s happening now,” Moody’s Analytics Chief Economist Mark Zandi told CNN’s Early Start. “It’s just creating all kinds of havoc,” he said.
It’s an almost universal view on Wall Street and in economics.
The Fed’s former vice chairman Roger Ferguson, now a fellow at the Council on Foreign Relations calls it an “antiquated mechanism that brings the country to the precipice of default every few years” and should be scrapped.
KPMG Chief Economist Diane Swonk says the politicization of the debt ceiling has weakened America.
“It is beyond time to rid ourselves of this antiquated law, which fails to actually invoke fiscal discipline, plays Russian Roulette with our status as a reserve currency and threatens to upend our economy,” she said.
“I fear if we do not abandon the debt ceiling and remove it from the arsenal of rules that can be used as a political piñata, we will incur more permanent damage to the US economy and our hegemony,” she said.
A default would threaten US Treasuries as the cornerstone of the financial system and undermine the US dollar as the world’s reserve currency. It’s a gift to America’s competitors, like China, as my colleague Stephen Collinson noted this week.
“From an economic perspective, debt ceiling negotiations are an inefficient use of time that carry potentially catastrophic risks for the creditworthiness of the US government,” agrees John Leer, chief economist at Morning Consult.
The ballot box and the budget process is where these decisions should be made.
“There’s a time and place for America’s elected officials to debate the country’s debt, and that’s during the legislative process,” says Leer. “When Congress passes bills, members are acutely aware of the budget implications of that legislation thanks to nonpartisan economists at the Congressional Budget Office,” he says. “Outside of the normal legislative process, Congress is also required by law to pass an annual budget resolution, but here again it frequently derelicts its responsibility.”
And the horse trading underway is more political than actually budget savvy.
“It doesn’t feel like even the solutions we’re coming up with here are going to address our long term fiscal problems,” says Zandi. “We’re talking about, you know, scaling back discretionary spending, non-defensive discretionary spending, but that’s not where the problem is with regard to our long-term fiscal problems,” he says.
Indeed, the major drivers of growth in the national debt are health care costs and payments for an aging population, net interest on the debt already accrued, and insufficient revenues. But debating tax hikes and reforms to popular programs like Medicare and Social Security are a non-starter. Budget experts agree it will take serious, hard, bipartisan work to prevent the national debt from choking the country in the decades ahead. Debt ceiling brinksmanship is anything but.
“Even the solutions we’re coming up with after all this drama isn’t really solving the problem,” says Zandi.
So is the solution to scrap it altogether, or come up with something better?
“The problem is we no longer budget – in fact, neither Budget Committee has even bothered to put forth a budget this year,” says Maya MacGuineas, president of the bipartisan Committee for a Responsible Federal Budget. “We need to reform the debt ceiling, because the risk of default only makes our economic and fiscal situation more precarious, but we need to replace it with something that would force lawmakers to adopt savings packages rather than the continued borrowing binge they are on,” she argues.
“For starters, rather than threatening not to pay our bills, lawmakers should promise not to engage in any new borrowing until our debt is under control, unless we are hit with an emergency where borrowing is needed.”