The Treasury Department will take “extraordinary measures” to postpone a collapse of the debt limit, … [+]
The looming federal debt crisis becomes more worrisome this week, as the Treasury Department will begin taking “extraordinary measures” to pay our bills. Although those measures can buy several months of temporary relief, President Biden may ultimately still have to take unilateral action to avoid a fiscal and economic collapse.
Without those measures, the US would not be able to pay all its bills on Thursday, according to Treasury Secretary Janet Yellen. That would threaten America’s credit rating and trigger a global panic in financial markets.
Remember we’re at this point because, unlike virtually every other country, we require a separate congressional vote to increase our lending. That loan does not go toward new spending, but only to cover expenses that Congress has already authorized by law. And staunch conservative Republicans are threatening a debt limit and an economic crisis to get spending cuts they couldn’t get through the normal legislative process.
Yellen will avoid a crash this week by using “extraordinary measures” to manage government cash flow and available funds. The term is dramatic, but these are really just accounting steps to reduce the burden on the Treasury. They include selling investments (to raise cash), not reinvesting various government retirement funds (again, hold onto the cash and not creating new debt), and not reinvesting cash in a currency stabilization fund.
All of these steps will create a budget space. But these accounting steps will only take us to sometime in June. If Congress has not acted to raise the debt limit by then, a major economic crisis will ensue.
Beginning in 1985, the Treasury has resorted to such measures to buy budget time, most recently in 2011, 2012, and 2021. In all of those situations, an agreement was finally reached to increase the debt limit before a deep crisis, although there were costs
In 2011, budget turmoil and debt ceiling battles led Standard and Poor’s to downgrade US debt for the first time. That rocked the stock market, raised interest rates and it ultimately cost us billions of dollars in higher interest payments to bondholders.
Me New School colleague Steve Pressman an excellent article on the debt ceiling notes that the Treasury measures “will give only a small amount of time”, so policymakers should not become complacent. The Treasury’s actions this week are not consolation, but rather an urgent call for Congress to act.
This is how we have avoided a debt ceiling catastrophe in the past. But the politics now may be even more difficult than previous clashes. As I mentioned earlier, House Speaker Kevin McCarthy (R-CA) got his seat because of deals made with combative hardline Republicans, one of whom said he was “willing to shut down government rather than increase the debt ceiling” was “non-negotiable.”
The longer Congress postpones action, the more difficult it will be. I spent time at The Hill, as Senior Economist to Senator Edward Kennedy (D-MA) and as Executive Director of the Congressional Joint Economic Committee. I am not optimistic about the role of Congress in this crisis. It is much easier to stop things in Congress than to do them.
Congress is slow to act even in less turbulent times, in part because of our constitutional design that feared swift government action and consolidation of power. We have two separate legislative chambers that can be controlled by different parties, and a chief executive not necessarily tied to legislative majorities. Our government is designed to move slowly.
But we also live in a highly partisan and divided period, dating back to the “Gingrich Revolution,” when Newt Gingrich (R-GA) discovered a route to power through confrontation and disruption rather than cooperation. Both parties have become more ideologically consistent over time, but nonpartisan Pew Research Center investigation finds that “Republicans have moved more to the right than Democrats to the left.”
This polarization makes any action by Congress that much more difficult. While there are technical steps Congress could use to resolve the debt limit (get rid of House petitions against President McCarthy’s will, Senate budget reconciliation to pass a clean debt limit, and confronting the Chamber), political pressures make it very difficult to achieve them.
Some Republicans, in turn, say Congress can prioritize which bills pay without creating much damage, so we shouldn’t worry so much. That is widely rejected by most financial experts and economists. neil bradleyexecutive vice president of the US Chamber of Commerce and a Republican ally, has said “prioritization doesn’t work,” while the Treasury Department says its payment systems are not set up to prioritize payments and have no legal authority . to do it
If Congress does not act in time, President Biden will face the first default in US history, with significant threats to the financial system, the economy, and millions of Americans. Biden will negotiate and work with Congress as much as he can, though he won’t be held hostage to cutting Social Security or other vital programs.
But the possibility of a congressional deadlock and resulting economic disaster is why I and many others are saying that Biden will have to consider drastic measures like minting and depositing a trillion dollar coin, or using the 14 of the Constitution.the Modification to annul the borrowing limit.
Those would be truly “extraordinary measures”, unprecedented in our history. Let’s hope it doesn’t come to that.
