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Background:
According to the U.S. Department of Treasury, “The debt limit 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.” The limit does not authorize new spending but raising it allows the government to fulfill its existing fiscal commitments, a large portion of which concern funding domestic programs and military defense spending. It is Congress’s responsibility to raise the debt ceiling in collaboration with the President, and it has been raised 78 times since 1960, with the last instance occurring in December of 2021 when Congress brought the ceiling to 31.4 trillion dollars.
Secretary of Treasury Janet Yellen has announced that we will hit this new limit by June 1, rendering this the same date by which the current standoff must reach a settlement. However, many Republicans view the June 1 date as a political statement designed to pressure House GOP members into abandoning their conditions to avoid default, claiming that Yellen is no longer an economist or professor but a politician, pushing a partisan agenda.
It is also important to highlight that accumulating debt in itself does not necessarily lead to unfavorable economic conditions. The U.S. has had a deficit budget (spending more money than bringing in) every year since 2001, with the total amount of debt rising 5.7% annually when adjusted for inflation. The economy has prevailed despite this growing debt for over two decades and thus the most-telling metric to analyze debt is by itself as a percentage of the size of the economy, where the size of the economy is quantified by GDP. This measurement is known as the debt-GDP ratio.
According to the World Bank, a debt-GDP ratio of 77% is the threshold, where any % greater than 77% slows economic growth. In fact, every percentage point beyond this limit costs the country 0.017 in economic growth. This amount may seem insignificant, but when put in context with the size of a national economy, the effects are quite tangible. The U.S. economy was measured at 23 trillion dollars in 2021. When calculated, 0.017% of 23 trillion is 3,910,000,000, or about 4 billion; Nearly 4 billion dollars are lost for every percentage point the debt-GDP ratio exceeds 77%. Despite this, it should be acknowledged that although the 77% rule is generally accurate, economic turmoil is not eminent in the event the rule is broken; Japan sits at a debt-GDP ratio of about 262% and its economy is sufficiently prosperous.
Far worse than an increase in America's debt-GDP ratio, however, would be defaulting on our debt. The fear of such an event constitutes the increasingly contentious debates surrounding a long-term increase to the limit that would permanently terminate the possibility of a default, and ease anxieties over another financial recession reminiscent of that from 2008. The last time that the political structure of the federal government resembled that of current times -- A Democratic president, a Democrat-controlled Senate, and a Republican-controlled House -- was in 2011 under the Obama administration. In a showdown that draws many parallels to the one we are witnessing today, a deal to raise the limit was finally struck after Republicans played what Obama called “Russian Roulette with the economy”, albeit only one day before default. Even though default was avoided, the U.S. still endured repercussions for its childish behavior.
Both companies and countries receive credit ratings from Standard and Poor based on their perceived safety for investment. These ratings are linked to interest rates, as lower ratings result in higher interest rights as a means to incentivize making a ‘riskier’ investment. Due to the default scare in 2011, Standard and Poor decreased the U.S. credit rating from AAA to AA+ because of an increase in perceived ‘political risk’ and growing ‘debt burden’ concerning our nation.
Many see today’s conflict as a straightforward power struggle between Democrats and the GOP attempting to leverage a potential economic crisis to further their respective agendas. However, certain behind-the-scenes factors impact public bargaining. A potential full-scale default is not the only economic killer that could result from the political turmoil. And lastly, a constitutional card could be played by President Biden that would permanently avert the crisis altogether, although such a move aimed at preventing an economic disaster could lead to a constitutional catastrophe.
Opinion:
The debt limit debates undoubtedly center around traditional Republican values of limited government spending (except when it comes to the military) vs. Democratic desires to fund a variety of domestic programs to ensure the well-being of less privileged citizens. Negotiations over fiscal policy in general are definitely appropriate, but they become irrational under the pressures of a looming economic D-Day. These circumstances provide unprecedented leverage to congressional GOP members enabling them to rush the Executive branch into accepting a coerced deal. The White House has acknowledged these revelations, stating that it is open to negotiations surrounding the federal budget, but not in the context of raising the debt ceiling. It believes those should be two completely separate conversations and for the sake of conducting equitable and even-handed negotiations, I agree.
The most recent bill passed by the House of Representatives in late April proposed a reduction in deficit spending of $4.8 trillion in compensation for increasing the debt limit, which would be expected to last into next year. The GOP's frugality would slash programs such as Meals on Wheels and undermine education funding, veterans’ benefits, and health care. The Biden administration has planted its feet when it comes to cutting domestic funding and has gone as far as to accuse House Republicans of ‘holding the American economy hostage’ by trying to undermine such programs in order to raise the ceiling in a recent Instagram post and has proclaimed it will only accept a ‘clean’ bill. Biden instead proposes increased taxation on wealthy executives, an area in which House Republicans present no wiggle room. With both higher tax rates and cuts to domestic spending off the table, the federal government finds itself with a scarcity of methods to resolve the debt crisis in the long term.
Despite both sides being unreasonably stubborn to a certain extent, GOP speaker of the House Kevin McCarthy has personal motivations that go beyond advocating his party’s agenda incentivizing him to stand his ground in the negotiations. Because it’s Congress’s job to raise the debt limit, McCarthy’s decisions impact the crisis’s outcome to the greatest degree; The fate of the U.S. economy is in his hands alone, and given his speakership’s lack of security, McCarthy’s rationality could become clouded over by individualistic decision making.
McCarthy eked out a narrow victory to become speaker of the House in January 2023 after a historic 15 rounds of voting transpired before his eventual ascendence to the position. The tumultuous process, however, undermined his respect and power within the House GOP chamber, rendering him virtually powerless. Because a singular member of Congress is able to bring a motion against McCarthy to challenge his speakership, he must be a puppet controlled by MAGA House members' desires if he hopes to retain his job. McCarthy himself may be willing to offer some level of leniency in negotiating with the Executive branch but we will never be able to validate this speculation because if he fails to uphold the demands of his chamber's hard-line conservatives, he puts his speakership at high risk for termination.
McCarthy finds himself at the helm of the GOP civil war and unfortunately, he must endorse what he may deem ‘unreasonable’ wishes, even at the cost of saving the American economy, in order to save his career. Because of this, it is not Republicans collectively who have Democrats in a negotiation chokehold but rather it’s hardline-conservative House members who have McCarthy in a chokehold for his job. These consequences are then reflected in the public debates between Democrats and Republicans, but the fact that the fate of the American (and potentially global) economy lies in the hands of McCarthy’s personal itinerary has remained largely concealed.
It is not unreasonable to infer that the whole crisis itself could be decided by McCarthy alone, and whether or not he chooses to prioritize his speakership or the economy’s well-being. For McCarthy, the decision is as simple as his own job vs millions of others. That is an intimidating prospect to reconcile with and in my opinion, McCarthy’s speakership was doomed upon its inception. He will always lack the universal GOP support required for him to advocate his authentic desires, and therefore, the choice has already been made for McCarthy -- Let’s just hope he listens.
Regardless of how the McCarthy speakership situation plays out, let me be clear: The United States government will not default on its debt. Yes, I know I’ve been spelling out the controversy and potential consequences surrounding a default extensively but mark my words: Everybody in the federal government, Democrats and Republicans alike, understands the irreparable damage that a default would cause to our nation and global economy. A default has never once occurred in our nation’s rich history and it’s not going to happen in 2023 either. It is a non-partisan agreement that as much as the debt limit represents an intriguing bargaining incentive, a default would destroy the economy, and therefore, nobody will allow it to happen. That does not mean, however, that the most obstinate negotiators aren’t willing to hold out until the very last second, because that’s exactly what happened in 2011. Weaponizing a potential economic system failure is not how the budget reform process should play out, but regardless, none of the proposed reformative solutions will prevent the rapidly approaching economic crisis. And besides, in an alternate reality where the Biden administration gives into House Republicans’ demands and the ceiling is raised, the same disaster will merely continue to repeat itself, and MAGA Republicans will pursue the same game of Russian roulette with the American economy time and time again.
There exists a contentious solution to these contentious debates, however. Enter the Executive Branch's not-so-secret weapon, Section 4 of the 14th Amendment, which reads that “the validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.” Some legal scholars have argued that these provisions could be used to address the debt ceiling crisis, by allowing President Biden to ignore the debt limit and continue to borrow money in order to prevent a default on U.S. debt. This argument has its roots in the idea that the 14th Amendment was enacted in the aftermath of the Civil War to prevent politicians from using the threat of default as a political weapon and that the language of Section 4 is broad enough to cover the debt ceiling issue. Counterarguments contend that the power to borrow and spend money is granted exclusively to Congress and therefore it would be unconstitutional for the president to unilaterally raise the debt ceiling. This solution represents unchartered waters, however, as since the debt limit’s enactment in 1917 it has always been raised through political negotiations and legislative actions rather than with legal challenges and constitutional arguments.
It’s blatantly obvious that invoking the 14th and raising the limit outside of congressional oversight should be avoided at all costs. This strategy would open up a new pandora’s box filled with executive overreach discord and could even provoke accusations of tyranny. However, if used to avert a global financial crisis, I would consider invoking Section 4 of the 14th Amendment the far lesser of two evils.
According to Harvard Law Professor and Co-Founder of the American Constitution Society Laurence H. Tribe, the right way to frame this argument is actually in the context of preventing an abuse of power by Congress. Let me break this contention down: Congress passes the legislation that requires government funding and causes deficit spending; They create the debt. Then, it is also Congress that controls the debt ceiling, or the amount of money the federal government can spend to fulfill its fiscal obligations. Because Congress determines both the amount of money needed to be spent and the amount of money allowed to be spent, they can simply authorize more spending than their debt limit allows for. This forces the president into negotiating to prevent default in a highly skewed process in which Congress possesses all of the bargaining power; They can essentially exercise their constitutional right to exclusively “borrow and spend money” to set an arbitrary spending limit that coerces the president and his administration to submit to Congresses demands.
Portraying the president's usage of Section 4 of the 14th Amendment as a means of preventing this exact type of congressional overreach of power that holds the economy hostage satisfies those critics who originally denounced it as an executive overreach of power. To effectively implement this tool, Biden needs to tell Congress that by unilaterally raising the debt limit he is not acting in the image of a power-crazed tyrant, but rather he is obligated by his oath to protect and uphold the Constitution to prevent the United States from defaulting on its debt and to make all required payments as they are due. To this end, I do see a world in which the courts uphold the validity of Section 4 of the 14th Amendment to combat the debt crisis, but it’s still extremely unlikely. Despite this effective and blatant solution sitting right beneath the noses of the federal government and legal scholars alike, the most likely course of action will be another down-to-the-wire stalemate in which the debt limit will be temporarily raised at the last possible moment, just so this vicious cycle can continue perpetuating itself. A default will be avoided, but a long-term solution is still underway.
As repeatedly mentioned, the federal government will not end up defaulting on its debt despite the pernicious turmoil surrounding the prospect of such a disaster, but I have also alluded to the idea that no default does not imply a lack of damages.
This reality is the true substance of my and many others’ concerns surrounding the foundational purpose of the debt ceiling altogether, and it all ties back to the credit ratings and relative interest rates referenced in the ‘background’ section of this article. As stated, even though the federal government avoided default in 2011, its credit rating was still decreased by Standard and Poor. The marginal decrease in itself doesn’t provide much cause for concern, however, if highly politicized debates surrounding the debt ceiling that use default as an intimidation tactic become a recurring trend, then we have an utterly formidable problem on our hands. The more polarized and unstable our political climate becomes, the riskier of an investment we will be seen as by both domestic and foreign investors due to a loss of faith in U.S. solvency. Our credit rating will drop and therefore, to incentivize investment so that we can continue to fulfill our financial duties, government bond interest rates must increase. This is a major issue because bond interest rates are proportional to interest rates on consumer commodities and so if the federal government is paying higher interest rates to its investors, everyday citizens will be paying higher interest rates on loans for mortgages, cars, dishwashers, you name it. Every new purchase becomes even more burdensome for the American consumer, and even previously purchased items without locked interest rates become strenuous financial liabilities. This will cause a decline in spending and thus the economy will contract. Although in practice this would be virtually impossible, in theory, the cycle could compound itself to the point where interest rates on government bonds become so high that interest payments trump the value of the investments themselves, and thus the federal government would be rendered incapable of generating funds. This example lies at the most extreme end of the 'what if' spectrum, but nonetheless, it is not completely farfetched in the realm of possibilities.
The main point here is not to underline the potential effects of higher interest rates but rather the common denominator that is causing this political crisis and a plethora of others. Nearly every contemporary political issue is derived from the same phenomenon -- polarization.
I’ve said it before, and I’ll say it again. The extreme stratification of our political parties and even more egregiously the GOP’s ‘my way or the highway’ mentality is the basis for the debt ceiling crisis and all factions of its consequences. It is polarization that’s causing a decrease in the United States credit rating, that will cause a spike in interest rates, that holds the global economy in a chokehold, and that has ensured we will continue to endure similar power-struggle crises for the foreseeable future. Federal-level political feuds will soon have tangible effects on everyday citizens, many of whom couldn’t care less about the political debates that inadvertently govern their lives.
It is a grave injustice to allow the vendettas of each party’s most extreme members to harm the general public, and it would represent the failure of a system that was contrived in 1787 specifically to represent the desires of the people. In theory, the government belongs to the people, so then why should governmental discourse in which the ordinary person holds zero interest impact them so greatly? Joe Schmo and Jane Doe couldn’t care less about McCarthy retaining his speakership, all they care is that they aren’t ousted from their 9-5 jobs or even worse, their place of residence, all due to a seemingly arbitrary spike in interest rates. Because of polarization and the subsequent intensification of political debates in the modern era, our nation is becoming solely characterized by the interests of the political elite. To them, every policy decision, piece of legislation, and supreme court ruling is nothing more than a power play to further their respective agendas and inflict damage upon the opposing party.
Government decisions are no longer made through the lens of attempting to benefit the people but rather are game pieces played in the contest for ascending to political supremacy. The political sphere, once dedicated to bettering the lives of American citizens through comprehensive and open-minded discussion, has evolved into a battleground for each party’s most vicious onslaughts to transpire. The people are merely an afterthought in the minds of our power-crazed politicians and I wish I could provide a reason to believe this is soon to change, but that would just be entirely unrealistic. The system is a feedback loop that exacerbates its own pitfalls. The divide between Democrats and Republicans will continue to expand, the debates will intensify, and the American people will continue to suffer.
In conclusion, despite the contentious debt ceiling debates, a genuine financial crisis is far from guaranteed. It will take a lot to tumble the world's most integrated and debatably most powerful economy, and until interest rates actually spike, start eating at government spending, and pin the U.S. Department of Treasury between paying out interest and fulfilling other fiscal obligations, we are financially fine. The state of our political sphere is the exact opposite. The government belongs to the political elite and on a grand level is controlled by their individual power schemes. The effects of this will soon be felt by citizens nationwide and maybe then will the American spirit to eradicate injustice be resurrected, and the capitol will be restored to the American people, serving its purpose to cater to the well-being of those who empower it.
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