It may come as a surprise to know that an artificial budget constraint dictates the investments of the public sector. However, despite the frenzy that envelopes Congress whenever the U.S. approaches the cap, negotiations about the debt ceiling are less a matter of practical finance than an excuse for partisan disputes over the allocation of government spending.
To understand how the Treasury operates, one must begin with the politics of how governments spend money to provide services, which is typically through taxation — or, as is political custom in the United States, through borrowing the difference between the cost of government spending and the amount that can be extracted from its incomprehensible federal tax system. Since the start of the war in Ukraine, U.S. humanitarian, financial, and military aid for the country has led to extraordinary spending on top of existing expenses. According to The Guardian, former president Trump passed one of the biggest tax overhauls in history, the Tax Cuts and Jobs Act, which enabled the richest households to pay lower tax rates than the bottom half of the American public. The combination of new spending and tax cuts has led the government to amass trillions of dollars in debt.
Despite overall economic growth, the economy has not grown at the same rate as government debt; consequently, Congress has had to raise or suspend the debt ceiling 78 times since 1960, according to the U.S. Treasury Department. The increasing deficit is complicated by corporate greed: when the government is in debt, it borrows money from corporations and individuals who have the means to lend money and benefit financially from doing so. Financial markets, of course, favour the exchange between the non-interest-bearing currency (the U.S dollar) with government bonds, because they’re default risk-free, and there’s a reward to be made. Naturally, appeasing these corporate lenders, whose donations are necessary to secure a place in political office, is then politically expedient.
According to The New York Times, the federal government hit the $31 trillion debt ceiling on January 19. Congress suspended the ceiling immediately afterwards, which essentially means ignoring the issue until May 19, when a decision must be made in order to avert a default. Political actors can only fathom the consequences of exceeding the debt limit. In general, most anticipate a payment plan that will prioritise paying certain bills, which invites obvious moral questions. What bills will the Treasury choose to pay on time, and which ones will be delayed and subordinated to political expediency?
Over the past few decades, Congress has raised the debt ceiling regularly; however, the present debates in Congress differ from the usual hysteria that has often preceded a bipartisan consensus to increase the limit. The deficit is increasingly being weaponized as a political tool by the GOP to leverage budget cuts. This tendency is particularly concerning given that House Speaker Kevin McCarthy, whose difficulty in obtaining a majority during the midterms enfeebled him, is subject to the whim of the most extreme and obstinate factions within the Republican party. In fact, The Washington Post reports that McCarthy has pledged to pass a House bill that would force the Treasury Department to prioritise interest payments on the national debt over other demands, such as Medicare payments or Social Security benefits, if the ceiling limit is breached.
The refusal to raise the debt ceiling is both calculated and counterintuitive. As a matter of fact, the absence of a debt ceiling lessens the likelihood of a default. The only practical justification for the existence of a ceiling at all is tradition and perhaps as a means of monitoring national credit ratings — since there is no reason a debt threshold to monitor government spending is even necessary, as the Treasury automatically compensates its loans every time a bond matures and is paid off. What’s more, lost in the debate over the debt ceiling is the fact that a debt-neutral economy is not necessarily a feasible or desirable goal.
The public narrative around national debt is that a deficit is inherently inflationary — a contention that neglects to consider the fact that it is normal for a government budget to be in deficit, as exhibited by the history of the United States, which has been in deficit for decades with relatively little inflation, according to Investopedia. Perhaps a more effective way to think of the deficit is as a surplus that is taken from the executive agency to be invested in different parts of the economy, such as public welfare.
A more relevant area of concern is the distributional question that is inseparable from the mechanism of bond issuance. Only wealthy corporate entities, who can afford to lend extra money to the government, will profit from interest payments through treasury bonds. Otherwise, there’s nothing inherently wrong with having investments that aren’t subject to the volatility of the stock market. Risk-free asset holdings can, for example, keep worker pensions safer for regular citizens.
The issue isn’t the existence of a national debt. It’s the manipulation of a fiscal tool to achieve political ends and fabricate an artificial crisis that can justify failing to uphold non-bond financial obligations.
