USA finance

The debt ceiling is an awkward place to talk about spending

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The debt ceiling snafu, which has the potential to wreck the US economy, is a civics lesson in the bizarrely inefficient way the American government spends your money.

Here’s the broadest outline of how members of Congress oversee trillions in tax dollars each year and the borrowing of money to make up for the annual shortfall:

  • They budget. Lawmakers debate and set priorities through a detailed budget process that was created in the 1970s. The White House initiates a budget proposal each year, and a set of budget committees take a look.
  • They authorize. A different set of committees votes to give the government authority to set up and run government programs.
  • They appropriate. A third set of committees actually OKs the spending of money, effectively telling the Treasury Department to cut checks.
  • They reconcile. Congress OKs the spending of more money than it brings in every year, so the budget process gives lawmakers an opportunity to bypass normal rules to address deficits. (Although in recent years, Republican lawmakers have used this special reconciliation process to pass massive permanent tax cuts for corporations, and Democrats have used it to fund new spending.)

The debt ceiling, the subject of the current drama consuming the nation’s capital, is something else entirely.

While legally separate from the budget process, it represents yet another check that has evolved into the system since a version of the debt ceiling was first adopted in the run-up to World War I.

The Treasury Department has been given gradually more leeway by Congress over how to finance deficit spending, be it for wars, emergencies or the creation of the social safety net.

While the size of that debt has exploded, the government guarantee behind it represents the solid backbone of the US financial system.

“America’s ability to borrow – and its sterling reputation for paying it back – is its superpower. And if it doesn’t do that – for the first time, ever – that reputation could vanish,” writes CNN’s chief business correspondent Christine Romans in an excellent piece of analysis.

Using the threat of default on debt for previous spending is an inefficient way to control future spending, she argues.

More from her report:

Do not mistake drama around the debt ceiling for actual fiscal discipline. Debt-ceiling brinksmanship is the least efficient way to address debt and deficits.

“Given the strict annual budgetary processes that are in place, it is not clear that the debt ceiling improves economic and financial governance,” said Mohammed El-Erian, chief economic adviser at Allianz. “On the contrary, it has tended to be used at times to meet short-term political objectives rather than enhance governance.”

Tempting a default and putting that system in jeopardy is exactly what makes the debt ceiling such valuable leverage. It’s the threat of actual economic catastrophe that has President Joe Biden at the negotiating table.

Eric Ueland is a former staff director of the Senate Budget Committee who later worked in the Trump administration. He’s currently a visiting fellow at The Heritage Foundation, a conservative think tank.

I called him looking for a Republican voice to defend the existence of the debt ceiling as a check on the White House, but we had a much more interesting conversation.

Controlling debt is very much a part of what the budgeting system is meant to do, even if the debt limit is an awkward way to do it. During his time on the budget committee, he said, there was an effort to examine alternatives to the debt limit.

“If what you’re seeking is a Republican to say the debt limit process itself needs to change, I think you’d run across a lot of Republicans who in the right set of circumstances might be open to that,” Ueland said.

“But if you’re trying to find a Republican to say that a question about how to increase the debt limit should never involve other policy priorities, my answer to that is no.”

A debate over debt, he argued, is an appropriate time to debate spending. Even though the budget process and the debt ceiling are distinct mechanisms, they’re all part of a process.

“Everything touches everything,” he said. “And before you make a unilateral change to one piece of the federal budget, you need to think about all the other pieces as well.”

Back in February, when this current debt drama was just percolating, I talked to Robert Hockett, the Cornell University law professor and consultant to the Federal Reserve Bank of New York who has argued that Biden, because of the Congressional Budget Act of 1974 that supersedes earlier legislation, has the ability to simply ignore the debt limit.

But he argued the reason Democratic presidents have not acted unilaterally either by simply ignoring the debt limit or invoking the 14th Amendment, is that both sides of the political aisle actually like this debate, as dangerous as it feels.

“It gives the Republicans a chance to posture before the public like they’re belt tightening and they’re disciplined. And they can also convey a sense of chaos out there in the world and blame it all on Biden,” Hockett told me.

“Meanwhile, the Democrats, people like Biden, benefit by it because he can lecture the Republicans about how irresponsible they are, how they’re deadbeats,” he added.

Investors seem to believe that lawmakers will ultimately figure this out, and there has not yet been an effect on markets even though the two parties are using default as leverage.

CNN’s Matt Egan argues it could take a market shock to bring lawmakers together.

“In some ways, the calm mood in markets is acting like a feedback loop. Investors are betting it’ll all get taken care of. Lawmakers are in no rush because the markets are not freaking out. Rinse and repeat,” he writes.

Lawmakers could have dealt with all of this months ago – the debt limit was breached back in January, but the Treasury Department has essentially been moving money around ever since.

There is skepticism among some Republicans that default is as imminent as Treasury Secretary Janet Yellen warns. She has consistently said the US could run out of money as soon as June 1.

House Majority Leader Steve Scalise wants to see the math behind that prediction and accused Yellen of “hedging” on the June 1 default date.

He and several other Republicans believe that incoming tax receipts will carry the US government further into the summer.

Scalise defended using the debt ceiling as leverage.

“There’s got to be some mechanism to tell Washington that you can’t keep printing money that you don’t have because ultimately, it’s future generations that pay this,” he said.

This debt ceiling standoff will be the first of many spending debates. Republicans could also try to control spending during the appropriations process. They could block authorization for programs they don’t like. They could more seriously approach the reconciliation process that both parties have come to exploit.

The difference between the debt limit and other methods to constrain spending is the almost universal prediction that a default would be painful, hitting the stock market, raising borrowing costs and potentially delaying Social Security checks.

Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis who was a Treasury Department official during the 2008 financial crisis, told CNN’s Poppy Harlow on Tuesday that the process of how Congress raises the debt ceiling should be changed.

“I think it would be prudent once we get through this scenario to figure out why do we do this to ourselves and can we come up with a more rational approach in the future,” Kashkari said.


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