As Congress returns from Thanksgiving fresh from carving turkeys, eating pumpkin pie and serving up polemics about the manifest blessings of America, it will be wrangling about raising the federal debt ceiling—again.
The federal government collects too little in taxes to pay its bills, and most months it issues new bonds as old ones come due to pay interest and for new deficit spending.
Democrats in Congress and pundits argue that they helped raise the ceiling when the Republicans were in charge. The government is required to pay for programs and commitments already in place and if the ceiling is not raised, the U.S. government will default, Social Security benefits won’t get paid, Democrats say.
The worst of that is demagoguery.
State of emergency
Under current law in fiscal year 2022, the Congressional Budget Office estimates that the government will spend $5.5 trillion but only take in $4.4 trillion. Over the next decade, the annual increases in the debt held by the public will average $1.3 trillion.
If Congress does not act to raise the debt ceiling, the director of the Office of Management and Budget would have money—just not enough to cover everything.
The president could declare a state of emergency—and direct them to set priorities, for example according to those expenses deemed essential during the 2013 government shutdown.
This could give priority to paying interest on the national debt, Social Security benefits, the salaries and essential procurement for the Army and Navy, and Medicaid and other benefits for mothers of young children and their offspring, while telling the states to suspend payments for working-age adults.
Federal law enforcement and prisons would need funding but the bureaucrats at the Federal Trade Commission and Justice Department antitrust and civil rights divisions could be furloughed—along with many other government agencies.
How pleasant it might be for local school boards, universities and state governments to not receive new mandates from the Education and Labor departments and the Environmental Protection Agency for the duration.
Funding could be suspended for regional agencies such as the Appalachian Regional Commission, which seem to cultivate dependency on federal programs more than economic development. And for National Public Radio, which is endowed and richer than most private broadcasters and cancels conservative voices.
Just another shutdown
Overall, it would look like a government shutdown from a failure to pass an appropriations bill, as occurred during the Obama administration.
Republicans could challenge these actions in court; however, if successful they would bear the political burden of a default.
With interest on existing debt paid and federal spending forced into balance, the Treasury could issue new bonds
to replace those coming due as it always does. Alternatively, the Federal Reserve could buy up expiring debt and fund that by selling Treasurys on its balance sheet having maturities further out in time.
Over the last 20 months the Federal Reserve has printed $4.3 trillion to purchase U.S. Treasurys to help finance $5 trillion in special pandemic relief and stimulus spending, because the bond markets can’t absorb that much new debt without pushing up interest rates and curbing the housing market and other private borrowing that keeps the economy going.
Pandemic relief enhanced entitlement benefits—for example, the refundable child tax credit, bigger food stamp checks and larger Affordable Care Act insurance subsidies—have contributed to a dramatic drop in the adult labor-force participation rate and worker shortages throughout the economy, an overhang in spending power and soaring inflation that businesses increasingly fear is structural—not transitory.
Making that kind of overspending permanent would spell stagflation, really engender fears that the value of U.S. Treasurys
could be eroded by 1970s-style inflation, push up borrowing costs, and create the mother of all fiscal crises. Then the half of all American households that pay no income tax would have to join the upper middle class and wealthy by paying for entitlements like their European brethren do.
That’s exactly what the Democrats want to do. Even a scaled-back reconciliation package would push up the annual deficit to at least $1.6 trillion. So many of the programs will have expiration dates within the 10-year tax-funding window that will be difficult for future Congresses—be they Republican or Democrat controlled—to let lapse.
Majority Leader Mitch McConnell and Republican senators should agree to increase the federal debt ceiling by just enough to permit a federal deficit of $1.3 trillion as the CBO projects for current law—not a cent more.
That may require a government shutdown to get the job done but unlike the 2013 affair, Republican actions properly explained could be a political asset.
Chastened by the Afghanistan debacle, rising prices and shortages, Americans are turning against bigger government and losing confidence in President Joe Biden.
The GOP needs to stand up for fiscal sanity.
Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.