Using the Debt Ceiling as a Political Pawn is Bad for America

February 9, 2014 Topic: Economics Region: United States

Using the Debt Ceiling as a Political Pawn is Bad for America

An expensive and ineffective tool.

The United States hit its debt ceiling last week. Now the government is deploying “extraordinary measures,” such as reducing the debt held by the federal employee pension fund, until policymakers can figure out how to pay its bills on time. If this sounds like déjà vu, it should. Washington faced the same scenario last October, only to come to a short-term resolution that suspended the borrowing limit. Months later policymakers are more or less back to square one, and using the same old backroom negotiations to achieve temporary debt solutions in conjunction with unrelated ideological victories. Unfortunately, the debt ceiling, and the ongoing negotiations, are just the tip of the iceberg.

America faces a tremendous fiscal challenge today and in the decades going forward. As the Congressional Budget Office (CBO) notes, fiscal deficits are expected to start rising in the near future, as national spending is expected to far outstrip GDP’s anticipated growth. These large deficits will contribute to substantial increases in federal debt. CBO estimates that federal debt held by the public will equal 74 percent of GDP at the end of this year and 79 percent in 2024, which is when it will begin to rise quickly. Such large and growing federal debt could have serious negative consequences, including restraining economic growth in the long term, giving policymakers less flexibility to respond to unexpected challenges, and eventually increasing the risk of a fiscal crisis wherein investors would demand high interest rates to purchase government debt.

The debt-ceiling standoff has become a familiar scenario for Democrats and Republicans in the last three years, most recently in October. It has been used as a tool to push through spending cuts, tax changes and budget deals. However, it is clear that neither party has much to gain from another showdown. Evidence suggests that the costs of protracted negotiations and the shutdown, as well as the economic uncertainty surrounding these talks are extremely high, and likely outweigh any benefits that might come out of such deals. Because of these costs, and even though long-term solutions are certainly warranted to reduce spending and debt levels, the debt ceiling hike should not be used as a threat point to force policy reforms.

The Office of Management and Budget and Standard and Poor’s calculated that the government shutdown in the run-up to October’s debt ceiling increase cost the U.S. economy around $24 billion and shaved a few points off GDP growth. The Council of Economic Advisers estimates that the combination of a government shutdown and debt limit brinkmanship may have resulted in 120,000 fewer private-sector jobs created during the first two weeks of October. The crisis also caused a drop in approval ratings not just for Republicans, but for Democrats as well. While more people blamed Republicans for the way they handled the crisis, a large majority also disapproved of the way Democrats handled the budget talks. In fact, according to a Gallup poll, 60 percent of respondents said that a third major party is needed to represent the American people.

Analysis by the Government Accountability Office suggests that delays in raising the debt limit created uncertainty in the Treasury market and lead to higher borrowing costs. In 2011 alone, these delays led to an increase in borrowing costs of about $1.3 billion. However, this does not account for the multiyear effects on increased costs for Treasury securities that remained outstanding after 2011. The Bipartisan Policy Center extended the GAO’s estimates and found that the delay raised borrowing costs by $18.9 billion over ten years.

These costs may be worth it if they resulted in a once-and-for-all fix to the system. However, the debt limit does not restrict Congress’s ability to enact spending and revenue legislation that affects the actual level of debt or otherwise constrains fiscal policy. All that it can do is limit the Treasury from paying for expenditures that have already been authorized and appropriated in the budget. Therefore, the people harmed by this are ordinary Americans who hold U.S. treasuries or depend on Social Security checks, Medicare benefits, federal salaries, tax refunds and other payments that are due to them from the federal government.

At the same time, the scurried, last-minute obsession with the debt ceiling detracts from the much larger problems facing the economy. In December, the U.S. economy added a pitiful 74,000 jobs. The labor market is in the grip of a serious crisis, with nearly 10 million unemployed individuals (of whom 4 million are long-term unemployed) and another 10 million who are involuntary part-time workers or discouraged workers. There are nearly 50 million people in poverty, and business hiring and investment are down. Solutions to this crisis are unlikely to arise from a few days of tough negotiations over the debt limit hike.

The debt ceiling debate also prevents us from talking about meaningful reform. For instance, the sequester may have resulted in drastic cuts in across-the-board spending, but it did little to bring about long-term reforms in entitlement programs, which are the biggest drivers of increased spending.

This is a time when Republicans and Democrats need to work together to make the economic recovery a reality for the millions of people living in poverty and unemployment. There needs to be more bipartisanship in the style of the Ryan-Murray budget talks, and less wielding of the power of the pen. There is some talk that Republicans may use the debt ceiling to force several legislative add-ons to the debt ceiling-such as construction of the Keystone XL pipeline and changes to Obamacare. But this would be a mistake. The debt ceiling talks are not the time to negotiate policy and defaulting on U.S. debt is not an option. The federal government has a constitutional and moral responsibility to repay creditors. Republicans should recognize that and allow the government to honor its debts to the public in a timely fashion, avoid the serious consequences of a debt default and restore faith in the system. This may help both parties to move forward and address the real challenges that America faces today. In this case, losing one battle may help win the war.

Aparna Mathur is a resident scholar in economic policy studies at the American Enterprise Institute.