Abolish the debt ceiling!
Mint the coin if you have to...
Takeaways (without the BS)
The US is poised to hit the debt ceiling this week.
The debt ceiling is an artifact of history. It should be abolished immediately.
The Treasury apparently has authority to mint platinum coins in any denomination, so in theory they could make a trillion dollar coin (or multiple coins) and use it to pay the bills instead of issuing debt. They should not do this.
Why are we talking about this?
The debt ceiling was identified as a key sticking point for House Republicans in their recent negotiations that resulted in Kevin McCarthy becoming Speaker of the House. A small group of Republicans wants to use the debt ceiling to leverage major spending cuts and a reduction in the size of the federal government. If they don’t get their way, then they’ve threatened to let the government shut down until they get their way. For his part, McCarthy looks poised to follow through and negotiation efforts with the White House are likely to fall short because Democrats don’t have much to gain by engaging.
What is the debt ceiling?
Exactly what it sounds like: a limit to the amount of new debt the US Treasury can issue. It has its origins in World War I. Prior to that time, the Treasury had to get permission from Congress each time it wanted to issue new debt and the needs had to be precisely specified ahead of time. Financing the war effort introduced much more irregularity and uncertainty to funding needs, so Congress gave the Treasury flexibility by essentially introducing what we know today as the debt ceiling. The Treasury could issue new debt to pay bills, but only up to a certain limit (the debt ceiling). This especially makes sense in a time of war because increasing taxes is the alternative to issuing debt. That is not politically attractive and would reduce morale in a country at exactly the wrong time. When the Treasury approaches the debt limit, it has to ask Congress to raise the ceiling. As you can imagine, this happens a lot!
The important thing to remember is that Congress has already authorized the spending, so failing to raise the debt ceiling means default is possible. You wouldn’t buy stuff on a credit card, then not pay your bill because you decided after the fact you’d gone over your budget. It’s not a perfect analogy, but you get the idea.
Is this a new thing?
Nope. The debt ceiling is a bipartisan, perennial bargaining chip. Politicians from both sides have always used it for leverage to get concessions on issues important to them. From the Treasury:
Since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit – 49 times under Republican presidents and 29 times under Democratic presidents.
You can do the math — the debt ceiling is raised, on average, more than once per year. This creates a lot of unnecessary uncertainty in financial markets. The correct thing to do is abolish the debt ceiling. If Congress doesn’t want the debt to increase, then they should consider that when creating and approving a budget each year. It is fine (and probably necessary) to have a conversation about spending outpacing revenue and identify ways to remedy that1; however, refusing to raise the debt ceiling does not do that effectively. If your car stopped running, you wouldn’t hit it with a hammer until it started. Even if it eventually works, you’re likely to do much more harm than good.
What happens if we don’t raise the debt ceiling?
In the worst case scenario? Default. You do not want the US to default on its debt. That could quickly devolve into a recession on a global scale. The US currently enjoys a unique spot in the world economy because investors (foreign and domestic) have a strong appetite for US debt. This means the US can borrow more and at lower rates than if no one wanted US debt. If you default, then you create that exact scenario — lots of borrowing needs with no one who wants to buy your debt. To attract lenders (that is, buyers of US debt), the US would have to offer higher interest rates on its debt which then leads to higher interest rates for everything else in the economy: mortgages, car loans, etc. Higher interest rates also mean a larger percentage of the government’s budget each year is spent solely on servicing the debt (paying the interest). This would be a significant self-inflicted wound for the government and the US economy. How does that sound? Pretty awful, right?
Coupled with the prospect of default is a government shutdown. If new debt is not authorized because you’ve reached the debt ceiling, then spending that has already been approved cannot be funded. Lawmakers will have to prioritize which bills they want to pay. Should we stop paying the military? Perhaps we should cut payments to senior citizens or disabled people? Would you like to shut down air travel? All of these are possible if the government is forced to shut down.
Can we just #MintTheCoin?
Maybe, but it’s unclear if it would withstand legal challenges and/or if Janet Yellen (Secretary of the Treasury) would actually do it. You can read more about the genesis of the idea this Vox article, in which they describe how the Treasury can mint a platinum coin of any denomination to sidestep issuing debt. It seems gimmicky, and would likely have lots of unintended consequences including setting a dangerous precedent. Can we #MintTheCoin? Yes, it appears so. Should we? No, but that depends on how long Republicans are willing to stand firm. The US has never defaulted on its debt and now is not the time to start — for any reason.
Where does that leave us?
As usually happens, Congress will probably drag its feet on raising the debt ceiling. The Treasury will be forced to use “extraordinary measures” to continue paying bills while Congress works out a deal. It looks like the US will hit the debt ceiling this week and the “extraordinary measures” might carry it through some point in the summer. Eventually, after a lot of TV coverage for the politicians and some grandstanding, a deal will probably be struck and the debt ceiling will be raised high enough to last a few more months. Then we’ll go through this all over again. Economically, this is really stupid. However, manufactured crises are embedded deep in the nature of politics so there is an exceedingly small probability that politicians do the right thing and abolish the debt ceiling. That’s a dangerous game to play, though. The more you mess around, the more you eventually find out (to paraphrase a recent popular meme).
In a future post, I’ll tackle the issue of the ballooning debt and if/when it is a problem.