Reviews |  Threats to weaponize the debt ceiling are more dangerous than ever

Reviews | Threats to weaponize the debt ceiling are more dangerous than ever


Peter R. Orszag, managing director of financial advisory at Lazard, is a former director of the Office of Management and Budget and the Congressional Budget Office.

Could 2023 be the year the debt ceiling time bomb finally explodes?

In October, House Minority Leader Kevin McCarthy (R-Calif.) warned that Republicans planned to use the debt ceiling as leverage to demand spending cuts, potentially including Social Security and Medicare — cuts President Biden won’t accept. Now that Republicans have taken control of the House and McCarthy is potentially the next speaker, the threat is real. And this time, thanks to shifting political forces and declining liquidity in the Treasury market, the peril is greater than ever before.

That makes the next lame session of Congress the most consequential since at least 1974. It would be wise to find a way to raise the debt ceiling before House control changes.

The debt ceiling – now at $31.4 trillion, a level expected to be exceeded by the third quarter of 2023 – is an anachronism. Congress enacts changes to tax laws and entitlement programs (such as Social Security and Medicare) and sets non-entitlement spending each year. These decisions, in turn, exhaust the policy levers available to control the level of US public debt. (The evolution of debt is also influenced by the economy, market interest rates and other factors, but these are mostly beyond the control of policymakers.) It is therefore redundant to have a separate limit on the level of leverage allowed.

As the Government Accountability Office has written, “the debt ceiling does not control the amount of debt. Instead, it is an afterthought that limits the ability of the Treasury to borrow to fund decisions already passed by Congress and the President.

If the debt limit were just a mundane accounting constraint regularly adjusted by Congress and the White House to reflect policies already in place, it might be harmless. But politicians have learned to wield it as a weapon.

This is particularly dangerous in today’s highly polarized environment, as the political norms that governed past negotiations – in particular, the idea that avoiding default is paramount – may not no longer hold. In a world where the exit ramps are unclear on crucial issues, including the war in Ukraine and growing tensions with China, there is no need to create a new Gordian knot around the debt limit.

Nor is it a good time to raise further questions about our country’s willingness to break our own laws and standards, a question frequently raised by business leaders and leaders around the world.

Another new concern relates to signs of declining liquidity in the Treasury market. In July 2021, the Group of Thirty, an independent organization of economic thinkers, reported that “the total amount of capital allocated to market making by bank-affiliated brokers has not kept pace with the very rapid growth of outstanding negotiable Treasury debt”. Other analysts point to the reduction in purchases of Treasuries by foreigners as a contributing influence; the Federal Reserve’s shift from expanding to shrinking its balance sheet is likely another aggravating factor.

Whatever the cause, falling levels of liquidity in the Treasury market lead to increased volatility. Treasury Secretary Janet L. Yellen is considering efforts to ease tensions, including a potential Treasury buyback program and greater transparency. It’s far from clear what measures will work, but what the Treasury market is definitely doing not need is increased uncertainty about the debt ceiling. Nervousness over declining liquidity in Treasuries makes debt limit threats more dangerous than in the past.

There are two ways to reduce the risks of the situation during the lame session of Congress. One is regular order, which would require the cooperation of Senate Minority Leader Mitch McConnell (R-Ky.) and a number of sitting Republican senators wise enough to join Democrats in fixing the problem now. . But that might not happen.

The other option involves a new budget resolution, which would facilitate the use of the reconciliation process to raise the debt ceiling, as was done in 1990, 1993 and 1997. This approach would require two votes – the first on the budget resolution and the second on the reconciliation. . It would take about two weeks of Senate time, but it could be accomplished with just 50 votes.

Any Democrat opposed to such a painful vote should now reflect on how much weight their party will lose once Republicans control the House – and how much higher the risk of default will then be. It’s usually not a good idea to start a negotiation with a ticking time bomb and a counterparty ready to let it explode.

The next two years will be eventful anyway. The president and Congress can make them less risky by addressing the debt ceiling in December.

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