As the debt ceiling crisis is manufactured, the Republicans’ willingness to crash the economy as the presidential election cycle gets started ought to be proof that Donald Trump and his allies represent an existential threat to the future of the republic and to democracy itself.
The US government pays a lower interest rate on Treasury securities because of the unparalleled safety and liquidity of the market, which is defined by the full faith and credit of the United States, but Republicans in Congress are once again jeopardizing the nation’s creditworthiness by using the debt limit as a political hostage.
Some estimates suggest that the “full faith and credit of the United States” is an advantage that lowers the interest rate our government pays —relative to interest rates on the debt of other sovereign nations— on the order of 25 basis points (a quarter of a percentage point) on average.
Given the current level of the national debt, this translates into interest savings for the federal government of roughly $60 billion this year and more than $800 billion over the next decade.
If a portion of this advantage were lost by allowing the debt limit to bind, the cost to the taxpayer could be significant.
In 2011, much like now, Republicans had just retaken the House while Democrats held the Senate and White House. The US came within 72 hours of actually defaulting on its debt, only narrowly averting it.
The GOP refused to pass an increase to the debt ceiling unless they got the spending cuts they demanded, Republicans’ refusal to back down on those cuts almost led the US to intentionally go over the brink for the first time, a near miss that contributed to the country’s credit rating getting downgraded by Standard & Poor’s.
Back then, markets plummeted, interest rates increased, and the country’s borrowing costs went up by $1.3 billion. That same scenario could play out once again, potentially in an even more chaotic fashion.
If the debt ceiling binds, and the US Treasury does not have the ability to pay its obligations, the negative economic effects would quickly mount and risk triggering a deep recession.
The debt limit caps the total amount of allowable outstanding US federal debt.
The US hit that limit—$31.4 trillion—on January 19, 2023, but the Department of the Treasury has been undertaking a set of “extraordinary measures” so that the debt limit does not yet bind.
The Treasury estimates that those measures will be sufficient at least through early June.
Sometime after that, unless Congress raises or suspends the debt limit before June, the federal government will lack the cash to pay all its obligations.
Those obligations are the result of laws previously enacted by Congress.
As Len Burman and Bill Gale wrote in a recent Brookings piece, “Raising the debt limit is not about new spending; it is about paying for previous choices policymakers.”
The economic effects of such an unprecedented event would surely be negative. However, there is an enormous amount of uncertainty surrounding the speed and magnitude of the damage the US economy will incur if the US government is unable to pay all its bills for a time—it depends on how long the situation lasts, how it is managed, and the extent to which investors alter their views about the safety of US Treasuries.
An extended impasse is likely to cause significant damage to the US economy. Even in a best-case scenario where the impasse is short-lived, the economy is likely to suffer sustained—and completely avoidable—damage.
By the time the Budget Control Act of 2011 was passed, some of the economic damage was already done.
Because the US was so close to default, the stock market had already dipped and the cost of borrowing had increased for the government as well.
Higher borrowing costs effectively mean the government has to pay more for loans and has fewer resources to spend on public investments like infrastructure.
Additionally, due to the reckless brinksmanship involved, the rating agency Standard & Poor’s Financial Services downgraded the country’s credit rating for the first time in US history, signaling to potential buyers that taking on US debt wasn’t as safe as it once was, and undercutting global trust in the country’s economy.
The outcome in 2011 revealed that even getting close to default was dangerous and had a problematic impact on the economy, but the Republican House majority— led by crazy Tea Party MAGA extremists —is back at the brink of destruction by threatening to stop paying the government’s bills.
Republicans seem a little surprised by the White House’s steadfast refusal to bargain and they have been divided over whether to focus on Medicare and Social Security cuts or if military spending should also be on the table.
“This is an entirely human-made crisis that adds extra cost to the taxpayer, that can lead to market volatility, and that’s totally avoidable,” said David Vandivier, a former Treasury Department official.