The standoff between House Speaker Kevin McCarthy (R-Calif.) and President Biden over the debt ceiling is fast approaching its ultimate resolution. Estimates are that the debt ceiling will be reached on June 1, which means that a deal must be achieved prior to or at this date to avert some sectors of the government shutting down and/or the government being unable to pay some of its bills. The economic carnage that could occur with the default has been well documented, with ripple effects across the entire economy — both in the United States and in financial markets around the world.
Yet in any high-stakes negotiation, there is no incentive for either party to reach a deal and compromise until the very last minute. This gives both players maximum leverage, hoping that their opponent will give in before they do. Such a strategy is the very foundation of game theory, which was used during the Cold War to protect against nuclear weapons being used in a confrontation between the two superpowers.
For the debt ceiling negotiation, the risks to both parties remain significant. Republicans will blame Democrats for their unwillingness to make sensible spending cuts as a condition for raising the debt ceiling. They are using the debt ceiling as an effective lever to rein in spending supported by Democrats that Republicans consider unnecessary or counterproductive.
Democrats are unwilling to tie raising the debt ceiling to spending cuts on programs that their constituents support and value. They say they want “clean legislation,” blaming Republicans for placing the entire economic legitimacy of the federal government at risk.
The very partisan nature of such negotiations is ingrained in each party’s platform, making the standoff over raising the debt ceiling debate less about money and more about policy.
Yet as we approach the deadline, the unintended consequences of this negotiation will become more apparent.
Financial markets function well when there is stability. As such, they may begin to react and respond to a pending default, which could benefit traders on Wall Street as they take advantage of more volatility in the bond and equity markets. High-frequency trading firms will reap enormous profits, since they make the most profits when markets are volatile, not placid. Some exchanges may need to halt trading if this volatility becomes too severe, though the likelihood of this occurring appears low.
The other issue is that a default may only last minutes or a few hours. Neither party is likely to allow it to extend beyond any measurable time period. Everyone understands that an extended default is unacceptable, given the risks associated with it.
Raising the debt ceiling has become so common that it is now ingrained in our political system. The debt ceiling was raised 74 times from March 1962 to May 2011 — on average around once every eight months. The statistics on each individual administration show that neither Republicans nor Democrats have been immune from the need to raise the ceiling, given that federal deficits have been the norm for decades; the last annual surplus was reported over two decades ago, in 2001.
An important takeaway from this debacle is that the debt ceiling is a distraction that must be abandoned. All the political energy and attention in Washington is being consumed by raising the debt ceiling, which most certainly will occur. Whether it happens before the deadline, averting a default, or after the deadline, resulting in a default, it is guaranteed that at some point the debt ceiling will be raised. That is indisputable.
The next eight days will continue the debt ceiling circus. It gives our elected officials an excuse to avoid addressing other pressing issues, like immigration reform, relations with China and the regulation of artificial intelligence, among others.
Ultimately, the major concern of all such people in Congress is their power and how to hold on to it. Voters can influence what Congress and the White House do, by how they vote at the ballot box. But until then, the debt ceiling circus will continue to its ultimate and predictable conclusion.
Sheldon H. Jacobson, Ph.D., is a founder professor in computer science at the University of Illinois Urbana-Champaign. A data scientist, he applies his expertise in data-driven risk-based decision-making to evaluate and inform public policy.