2023 US Debt Ceiling Drama

According to the constitution, Congress must authorize all borrowing on the credit of United States. To provide adequate funds to finance World War 1, Congress modified the method by which it authorized the debt issue in the second Liberty Bond Act of 1917. Under this act, Congress established a statutory limit or a debt ceiling on the total amount of bonds that could be issued. Since the rate of growth of US debt is faster than that of its national income, the US has hit the debt ceiling multiple times in the past.

On January 13th, Secretary of Treasury Janet Yellen sent a letter to the US congressional leadership notifying them outstanding US debt is set to hit the statutory limit set at 341.381 trillion US dollars and that the Treasury will have to take extraordinary measures to meet the government's debt obligations. On January 19th, the US hit the debt limit, and the treasury department started taking those measures. 

The US treasury pays US govt bills by issuing debt. Remember that these are not new government spending but legal obligations already committed to, which means the expenditure being discussed is already being made. Republicans in the opposition are also aware of this and use the debt ceiling approval process to extract promises for future spending, or it can try to roll back the spending made through Biden’s inflation reduction and the loan forgiveness act.

This showdown between the government and the opposition happens every time; why are people concerned in 2023?

Congress appears to be more chaotic than ever in the past. A few weeks back, Kevin McCarthy became the first party leader to fail to be elected speaker in the initial round of voting. There could be a replay of a similar instance where a small group of rebels can hinder the shared goals of Congress. In 2011, similar squabbling in Congress caused US debt to be downgraded. This resulted in an 11% drop in the stock market and raised the borrowing cost of govt by $1.3 billion that very same year. Failure to reach a consensus will lead to temporary govt spending cuts; companies whose revenue comes from the government, like defence and infrastructure, will have a hard time. A lengthy default could result in a financial crisis, leading to an economic recession.

The Treasury has never exhausted its list of "extraordinary measures", resulting in default, but what happens if Congress allows a default to occur? The govt then has a few solutions up its sleeve: 

The president can invoke the 14th amendment. Section 4 of the amendment states 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," which essentially makes it unconstitutional for US govt to default. President Bill Clinton even said he would use the 14th amendment. But such a move is legally questionable and reeks of desperation besides displaying how dysfunctional the US government is.

Another option is for the Treasury to mint a trillion-dollar platinum coin. If this confuses you, then no, the coin does not need to contain trillion-dollar platinum in it; it can be given a face value of a trillion dollars. The coin can then be deposited at the federal reserve, and the govt can use the money to make payments without violating any statutes of the constitution. This crazy idea came up in 2011 when Obama was president. Paul Krugman even endorses this.

Another alternative would be for the Treasury to issue premium bonds to replace existing bonds. These new bonds will contain a high-interest rate, and the debt will go up by face value. However, trying to work around it without congressional intervention never looks good. 

The US and Denmark are the only countries with an absolute value for the debt ceiling. The debt ceiling does not even serve any practical purpose. With the same drama coming up every few years, it is clear that the US has a severe long-term fiscal problem. It also shows that America's governance and policymaking could be more stable. With a host of economic and geopolitical challenges that the US is facing today, it makes no sense to be bickering over the debt ceiling and using it as a political weapon. It is time for the ceiling to go away.