For most Americans, the current standoff between Congress and the White House over the federal debt ceiling probably seems like a repeat episode of a TV show. The characters may look a little different, but the dialogue about deadlines, demands and predictions of economic collapse hasn’t changed much.
Viewers expect to see all the drama resolved in the finale with a last-minute agreement to prevent the unthinkable and set the stage to see the same episode next year. The problem is — like many boring TV episodes— the participants in the debt-limit drama have done a poor job explaining what is happening and, more importantly, what is at stake.
While serving as staff director of the Senate Finance Committee and as an assistant Treasury secretary, I participated in about a dozen negotiations regarding debt limit increases. In each case, leaders on both sides always understood, despite some public statements and posturing to the contrary, that raising the debt ceiling was a matter of necessity.
The U.S. hit the $31.4 trillion debt limit earlier this month. Treasury Secretary Janet Yellen has invoked “extraordinary measures” to let the Treasury stay under the limit, extending the deadline for congressional action until early June.
Put simply, if Congress does not grant additional borrowing authority, the federal government will eventually be unable to make payments on all its debt obligations. The ripple effects of this outcome would be calamitous.
For example, U.S. Treasury securities are widely considered to be one of the most reliable investments in the world. That would no longer be the case if the government started defaulting on its obligations. Investors in these securities would rightfully demand higher interest rates, which would then be passed along to consumers’ mortgages and car payments and limit businesses’ ability to access capital and create jobs.
Likewise, the U.S. dollar is used by banks and national governments all over the world to back trillions of dollars in assets. If the U.S. government stopped paying all its bills, the demand and relative value of the dollar would go down, making our exports more expensive and decreasing demand for U.S. goods and services abroad.
Some insiders insist that, if Congress fails to increase the debt limit, the government could prioritize its spending to cover debt obligations and ostensibly avoid a default. However, shifting funds to cover debt and interest payments would mean leaving other obligations — such as Social Security benefits, military salaries or payments to private government contractors — unpaid.
That would not only cause serious hardships, but it would also, by any objective definition, still be a default. It would still reduce confidence in the U.S. government’s credit. Additionally, it would have many of the same negative consequences for the economy.
Most elected officials and policymakers at the federal level understand all this, which is why (most of the) previous episodes have largely been resolved well in advance of any potential default. However, many believe the script has changed in 2023. They claim House Republicans, many of whom now appear willing to take the country over this cliff, really mean it this time.
That may very well be true. The GOP’s House majority is tenuously thin. Recent events strongly suggest this may give more extreme members disproportionate influence in these types of debates. So, even if the vast majority of House Republicans recognize the need to raise the debt limit, the caucus’s right flank could make it extremely difficult to do so.
However, both Republicans and Democrats tend to play political games with the debt ceiling when the opposing party controls the White House. When President George W. Bush was in office, most Democrats in Congress — including President Biden when he was serving in the Senate — voted against raising the debt limit on multiple occasions. And, while Democrats are currently demanding a “clean” increase for Biden, they openly used the debt ceiling to leverage budgetary concessions from President Trump in 2017.
In other words, there may be legitimate concerns about where House Republicans might take the current debt ceiling negotiations — but they have not yet ventured into unseen territory.
Finally, while past episodes of the “Debt Ceiling Show” may seem repetitive, they are not all the same. For example, in 2011, after a prolonged deadlock, Congress passed a bill to increase the debt ceiling mere hours before the Treasury Department’s stated deadline. In addition to hiking the debt limit, that legislation created a series of complicated deficit-reduction mechanisms — including the so-called “super committee” and budget sequestration — that both sides would rather forget.
In addition, although there was ultimately no default, the mere threat created by the lengthy standoff between the executive and legislative branches led Standard & Poor’s to downgrade the U.S. credit rating for the first time in history. As most will recall, the market response was not kind.
Looking back at this previous episode, negotiators — and the viewers home — should recognize the folly in using the debt ceiling as leverage for major reforms or policy changes. It should also show everyone how dangerous it can be to use the full faith and credit of the United States as a bargaining chip.
Chris Campbell is the former staff director of the Senate Finance Committee and former assistant secretary of the Treasury for Financial Institutions. Campbell is the chief policy strategist at the financial advisory firm Kroll.