Joe Versus the Volcano: How Biden’s Debt Ceiling Deal Could Engulf the World Next Time

Posted in: Tax and Economics

Remember the debt ceiling? Between record-breaking toxic air from Canadian wildfires choking half the country and the first-ever federal indictment of a former President, it’s easy to forget that just two weeks ago financial markets were on edge over the possibility that the United States government might, for the first time in history, default on its obligations. At least we don’t have to worry about that anymore, right?

Wrong. The debt ceiling will come roaring back on January 2, 2025, one day before the new Congress is sworn in. Depending on who wins the upcoming presidential election and which party controls each house of Congress, raising or suspending the debt ceiling again at that time could prove problematic.

To be sure, for now we are pleased that President Joe Biden was able to reach a deal with House Speaker Kevin McCarthy that avoided the deep and destructive cuts to social spending programs that House Republicans had sought. We were likewise pleased that most House Republicans did not join with their hardest-right fringe to scuttle the deal. Accordingly, we are happy to give credit to President Biden, even though we believe that it was a mistake to negotiate with McCarthy in the first place.

We also think that now is a good time to step back and reflect on the very nature of these recurring debt ceiling crises. Barely more than a year and a half from now, we may once again need to explain why, should push come to shove, issuing conventional debt in excess of the debt ceiling would be the President’s least unconstitutional, and thus least bad, option. For now, however, we want to focus on the big picture.

The Debt Ceiling Has Nothing to Do with Debt

Just because the word “debt” is in “debt ceiling” doesn’t mean that imposing a debt ceiling stops debt from accumulating, given that the amount of debt that the federal government builds up is caused by the difference between spending and taxes every year, whether or not Congress claims separately that it is limiting debt.

Over the last several months, journalists sometimes did a decent job of distinguishing between the debt ceiling—which purports to artificially and arbitrarily limit the government’s legal authority to borrow money to pay the bills that are already due—and debt, which reflects the cumulative gap between tax revenues and expenditures.

There were high-profile exceptions, unfortunately, including a New York Times news reporter (not a pundit) who wrote an article titled, “The Debt Ceiling Debate Is About More Than Debt,” which is like saying that the boxers-versus-briefs debate is about more than astronomy or that the debate about basketball’s greatest player is about more than baking. Even less cleverly, one fiscal hawk simply proclaimed that the Democrats’ completely accurate statement “that there’s no link between the debt ceiling and annual budget deficits” is a “specious argument.” When all else fails, pound the table.

So yes, demagogues who should know better and knaves who know nothing continue to conflate debt and the debt ceiling. In the face of disinformation and ignorance, all we can do is persist in patiently explaining that if one is worried about deficits and debt, the way to address the matter is through the budget process, not by threatening default.

However, we have occasionally heard fiscal hawks make something that has the form of an actual argument, defending the use of the debt ceiling as leverage for seeking budget cuts and thus supposedly decreasing debt in the long term. Their argument is wrong but has sufficient superficial appeal to warrant rebutting. Accordingly, we will spell it out and then explain why it fails.

Some GOP-aligned fiscal hawks analogize the Republican House of Representatives to a responsible parent and the President to a spendthrift young adult. If your 21-year-old daughter had a $10,000 MasterCard bill because she spent money she didn’t have on expensive meals, travel, and clothing, you might agree to pay her debts, but only on condition that she surrender her credit card and commit to living on a budget. Conditioning the payment of current debts for past spending on reduced future spending, the analogy indicates, is perfectly logical.

We suspect that something like the foregoing analogy may explain why the public is so easily confused about the debt ceiling and why many people resist the characterization of congressional Republicans who use the debt ceiling as leverage as “hostage takers.” The parent in our hypothetical scenario is not a hostage taker, people may think, so neither are congressional Republicans.

Yet the spendthrift analogy is deeply flawed. The debt does not belong to the President as opposed to Congress but to the United States as a whole. Thus, a better analogy would be someone making a threat to himself not to pay his own credit card bill unless he cuts his future spending. Although cutting future spending in that scenario might or might not be wise, there really is no option of not paying the bill for the spending that has already been added to the tab.

Aha, our fiscally hawkish interlocutor then says, but we can conceptualize the two major political parties as the relevant actors. The bills were run up because Democrats spent money they didn’t have when they controlled Congress, whereas Republicans are now trying to clean up the mess.

But that’s also not true. Putting aside entitlement spending on Medicare and Social Security—which Republicans have said they don’t want to cut at all, thanks to their own-goal at this year’s State of the Union—the main drivers of growth in the debt fall into three categories: (1) tax cuts mostly for the wealthy and corporations supported by Republicans; (2) bipartisan support for military expenditures and to support the economy through the pandemic; and (3) domestic spending initiatives like the Inflation Reduction Act supported by Democrats. If Republicans had their druthers, the government might have spent a bit less; if Democrats had their druthers, the government would have continued to collect a lot more in taxes from wealthy individuals and corporations. At best, both parties contributed to the debt’s growth.

Hence, whatever intuitive appeal the spendthrift child analogy has, it does not fit the facts.

No Nexus to Debt

Indeed, the spendthrift child scenario does not even fit how the debt ceiling has been used as leverage. After all, Republicans did not demand only that President Biden and Senate Democrats cut future spending as a condition of suspending the debt ceiling. They also demanded measures that have nothing at all to do with the level of debt.

Work requirements for federal benefit programs are one example. They do not lead to increased employment and, more to the present point, they do not save the government money. The best that can be said for work requirements is that they are conceptually related to federal expenditures because they are imposed as a condition of participation in federal benefits programs. But adopting cruel barriers to receiving benefits because those barriers might reduce spending in some alternative universe does not mean that they reduce spending (or debt) in ours. Putting them into a deal that was supposedly about reducing government debt was simply a matter of Republicans succeeding in further shredding the social safety net, because they saw an opportunity to do so and seized it.

Other Republican demands lacked even that tenuous connection. Indeed, the legislation that was enacted pursuant to the Biden/McCarthy deal contains an entire section—Title III—that streamlines the permitting process under the National Environmental Policy Act of 1969. Although weakening environmental regulation in this way may enrich polluters in the short run, it does not have any substantial effect on or connection to the national debt. Moreover, when the time comes to pay for the consequences of environmental damage, that will increase spending, not decrease it.

Thus, even if we were to accept (solely for the sake of argument) the claim that congressional Republicans are like the responsible parent and the Democratic President is like the spendthrift child, the analogy to the parent paying the child’s debts in exchange for cutting up the credit card would fail. It’s more like the parent agreeing to pay the child’s debts on condition that she break up with her boyfriend. One side is exploiting financial leverage for something having nothing to do with finances. And even where finances are involved, the “cutting up the credit card” logic can be perverse, such as parents demanding that their daughter do something that is bad for her future, like dropping out of college. Penny wise and pound foolish, indeed.

A Volcanic Thought Experiment

Once one understands that the debt ceiling is merely a source of leverage and has nothing to do with debt or spending levels, one can sever the appearance of the connection from the other direction as well. Republicans happened to seize on the debt ceiling, but only because failure to raise or suspend it would be catastrophic. However, they could have taken advantage of any law that, if not amended, would lead to catastrophe.

As a thought experiment, imagine that there were no debt ceiling but that a lame-duck Republican Congress and President were looking for a way to hobble an incoming Democratic President. They might enact a debt ceiling, or they could enact any other disaster-inducing legislation that they might be able to concoct.

For example, Republicans might decide to enact a law that requires hurling 10,000 teenagers into an active volcano on July 4, as tributes to the gods. When Democrats tried to repeal the Hunger Games Hostage Act (HGHA), Republicans in control of the House could hold out for whatever concessions they might extract from a Democratic President who is reluctant to entomb innocents in lava.

Or, noting that HGHA would be unconstitutional (as is the debt ceiling, but we digress), Republicans might instead pass a law requiring the federal government to toss all of the contents of the National Archives, the Library of Congress, and the Smithsonian Institution into the volcano. When Democrats tried to repeal the Independence Day Volcano Propitiation Act (IDVPA), Republicans would say, “We’re willing to let this bad thing happen, so you have to give us everything we demand before we’ll agree to stop it.”

If HGMA and IDVPA seem far-fetched, even ludicrous, we would remind readers that they are just as gratuitously pointless as the debt ceiling statute itself. By law, the Secretary of the Treasury can only borrow enough money to cover expenditures, wholly apart from the debt ceiling, so the debt ceiling is completely unnecessary even on its own terms. Like HGMA and IDVPA, the debt ceiling statute can only ever operate as a source of leverage for extortionists or, if neither side blinks, as the means of inflicting terrible damage to the country.

In short, there is no justification for using the debt ceiling as leverage or for the debt ceiling itself to continue to exist.

Comments are closed.