Get Rid of the Debt Ceiling Once and for All
Regularly putting the entire economy at risk is in no way “fiscally responsible.”
By now the scenario is familiar, but at the time it was unprecedented: House Republicans, having recently won a majority in the midterm elections, threatened to force the United States to default on its debt unless a Democratic president acceded to their demands.
The year was 1995, and I was serving as secretary of the Treasury under President Bill Clinton. Raising the debt limit to avoid default, which had previously been a perfunctory matter, was now a catalyst for crisis. For months, Speaker Newt Gingrich threatened to plunge the country into default unless Clinton signed the House Republicans’ budget bill.
Having come from the financial industry, and being relatively new to Washington, I remember being surprised. I knew the legislative process was messy, and that hostage-taking was frequently part of it. Still, the notion that the government of the United States would, for political reasons, not meet its financial obligations seemed outside the realm of possibility.
Although Gingrich eventually backed down, in many ways the most jarring surprises were still to come. President Joe Biden is now the third straight Democratic chief executive to have faced post-midterm debt-ceiling demands. Over the past 30 years, debt-limit crises, once practically unthinkable, have become a recurring feature of American life.
That America did not default on its debt, and that the short-term danger has passed, is cause for great relief. But over the longer term, the threat of regular debt-ceiling brinkmanship is a crisis unto itself. Requiring a vote to raise the debt limit serves no valuable purpose, and it creates a wide range of economic and geopolitical risks. Congress must pass legislation to eliminate the need to vote on the debt limit altogether.
I say this as someone who has long been worried about the size and sustainability of our national debt measured as a percentage of our GDP. I’m proud to have been part of an administration that balanced the federal budget and produced the first government surplus in nearly three decades. In recent years, I’ve grown more and more concerned about the unsustainable trajectory of our fiscal situation, and I’ve argued that view even at times when it was unpopular with many of my fellow Democrats. But running a risk, however small, that the United States defaults on its debts is no way to get our fiscal house in order.
Nor is the risk of default as low as many on Wall Street and in Washington seem to think. It was always unlikely that this latest display of brinkmanship would lead to default, and it is also unlikely that the next one will. But unlikely is not the same thing as impossible. Moreover, even if the risk from each individual debt-limit crisis does remain low, the cumulative risk of default over repeated crises is likely to be far higher.
If such a default were to occur, it’s highly probable the damage would be widespread and immense. There would be tremendous disruption in the market for Treasury bills, and because T-bills are used as collateral around the world, this could easily lead to crises in other markets as well. Investors might see a run on money-market funds. Equity markets could suffer severe losses. Historically, Treasury sets what’s always been viewed as a risk-free rate, with other rates—for car loans, mortgages, and small-business loans, to name just a few examples—tied to that. If T-bills were no longer considered risk-free, those other borrowing costs could go up, raising expenses for families across America. America’s broader geopolitical credibility—not just on matters of its debt, but on an enormous set of issues—could be severely diminished by any default.
These self-inflicted harms would hurt American families in the short term. But by creating a slowdown in economic growth, they would also lead to less tax revenue collected by our federal government over time. This would mean larger debts and a smaller GDP, and thus a higher debt-to-GDP ratio. In other words, debt-limit hostage-taking in the name of fiscal responsibility could actually make our fiscal outlook meaningfully worse.
Even if debt-limit crises never lead to an actual default, the mere specter of default can be enough to cause real harm. I’ve spent most of my career making decisions that involve financial issues, and I can’t imagine investing in a firm that regularly debates whether or not to pay its debts. Thus far, the markets have yet to apply that logic to the United States Treasury. But in my experience, markets don’t always incorporate risks steadily and gradually. Sometimes, they ignore something until they don’t. If the markets eventually decide that the risk of default, however slight, is meaningful, it will drive up borrowing costs for the federal government. This will either increase our deficits or force the government to make unnecessary cuts in order to redirect funds toward higher payments on interest.
Simply put, debt-limit brinkmanship carries with it extraordinary risks, nearly all of which would, if they came to pass, harm our economy in the short term and worsen our fiscal outlook over the long term. Threatening default is many things—but fiscally responsible is not one of them.
Such extreme tactics are not necessary. Congress can make decisions regarding taxation and spending through the budget process, just as it historically has done. In fact, significant deficit reduction can likely be achieved without significant harm to most Americans. This is because the deficits of more recent decades have been driven primarily by new tax cuts targeted overwhelmingly at the wealthiest Americans. By bringing upper-income tax rates, corporate tax rates, and capital-gains tax rates back in line with those of the 1990s; closing tax loopholes; decreasing Medicare costs through improvements to our health-care system without sacrificing the quality of patient care; and pursuing targeted spending cuts where appropriate, we could restore a sound fiscal trajectory without hurting the country’s overall economic growth or the typical American family’s economic well-being. None of this requires a process related to the debt limit.
I’ve now spent more than half a century thinking about markets and economic policy, and analyzing risk. For most of that time, I thought the debt ceiling was either irrelevant, because Congress would lift it as a routine matter, or that the risk it posed to our economy was too remote to be worth worrying about.
But faced with years of political dysfunction and decades of debt-ceiling crises, I’ve changed my view. The debt limit serves no useful purpose, and repeated threats not to raise it could lead to meaningful economic harm even if we don’t default, and immense harm if we do. Raising the debt limit, as lawmakers have finally done, is important but insufficient. Responsible lawmakers should aim to do something more ambitious, and with far more potential benefit to the American economy: eliminate the debt limit entirely.
What America just went through was not the first debt-ceiling crisis. But it can and should be the last.