Raising the debt limit is needed to preserve the full faith and credit of the United States
One of the bedrocks of the U.S. and world economy is the full faith and credit of the United States: the secure expectation that the U.S. government will pay its obligations in full and on time. The United States’ rock-solid credit allows financial markets to function and the country to pay low interest, or even negative real interest, to bondholders based on the certainty that they will be paid interest and principal on time. It also gives Americans, such as Social Security beneficiaries, veterans, military and federal civilian employees, beneficiaries of federal programs, and countless others, the security of knowing that they will receive the payments they rely on and are entitled to.
The United States has never defaulted on its obligations. The closest thing was a minor technical snafu in 1979 that was quickly fixed.
From time to time, Congress must raise the debt limit to prevent the country from defaulting. The debt limit is a 104-year-old provision that places a dollar cap on the total amount of outstanding debt that the Treasury Department can have to finance the government’s ongoing legal obligations. The debt limit is an unnecessary historical relic; almost no other comparable countries have one. The actual public debt is determined not by the debt limit but by the substantive spending and revenue laws that Congress passes.
In practice, the debt limit serves little function other than to potentially enable factions in Congress to force the United States to default on obligations it has already incurred—if they are reckless enough to do so.
The debt limit debacle of 2011 must not be repeated
Before 2011, parties in Congress never seriously threatened to force the United States into default to extract concessions. But then, the House Republicans’ reckless gambit brought the country to the brink of disaster. Even though the United States narrowly avoided default, the episode raised costs of borrowing for the government, private businesses, and homebuyers, and it slowed the already struggling economic recovery by undermining consumer and business confidence.
No good came out of the 2011 crisis. The resulting agreement produced an ill-conceived budget “sequester” that further slowed the economic recovery and resulted in chronic underfunding of key priorities.
Since 2011, every time the debt limit has needed to be raised, Congress has raised or suspended it without incident and on a bipartisan basis. Congress did so on a bipartisan basis seven times since that year: in 2013 (twice), 2014, 2015, 2017, 2018, and 2019.* Then-President Barack Obama took the position after 2011 that he would never again negotiate over the debt limit. Similarly, the Trump administration repeatedly urged Congress to pass “clean” debt limit increases—that is, debt limit increases without conditions.
A majority of Senate Republicans, including then-Majority Leader McConnell, supported suspending the debt limit all three times it was needed under Trump.* The most recent time, in 2019, McConnell explained:
[The debt limit suspension] ensures our federal government will not approach any kind of short-term debt crisis in the coming weeks or months. It secures our nation’s full-faith and credit and ensures that Congress will not throw this kind of unnecessary wrench into the gears of our job growth and thriving economy.
Raising the debt limit is just as imperative now as it was in 2019. The only difference in 2021 is that a Democrat sits in the White House.
A U.S. default would be catastrophic
When the United States reaches the debt limit, the Treasury Department cannot issue additional debt and therefore risks running out of cash. With the debt at the limit, the Treasury is now buying time through previously used accounting moves known as “extraordinary measures.” Unfortunately, those measures will probably only last into October, according to Treasury Secretary Janet Yellen. At that point, the government will not be able to meet its ongoing legal obligations. It would default. And while no one knows precisely what that could mean, the consequences could entail:
- Social Security checks stopping, putting the livelihoods of millions at risk
- The military and federal workers not receiving their paychecks
- Providers such as hospitals and doctors not being paid for services provided under Medicare and Medicaid
- People filing taxes on extension this fall not getting the refunds they are owed, and monthly child tax credit payments ceasing
- Countless families and businesses being thrown into turmoil as they are stiffed on many other kinds of payments
- Critical government services shutting down
In addition, a U.S. default would cause chaos in global financial markets. Treasury bonds set the benchmark for the risk-free interest rate—and if the government suddenly defaults on the payments on those bonds, the financial system would be fundamentally uprooted. The financial system could melt down even worse than it did in 2008, drying up credit and grinding commerce to a halt.
As Treasury Secretary Yellen told Congress in June:
Failing to increase the debt limit would have absolutely catastrophic economic consequences. It would be utterly unprecedented in American history for the United States government to default on its legal obligations. I believe it would precipitate a financial crisis. It would threaten the jobs and savings of Americans, and at a time when we are still recovering from the COVID pandemic.
Mark Zandi, chief economist at Moody’s Analytics, said: “It would be financial Armageddon. It’s complete craziness to even contemplate the idea of not paying our debt on time.” And JPMorgan Chase CEO Jamie Dimon said that a U.S. default “could cause an immediate, literally cascading catastrophe of unbelievable proportions and damage America for 100 years.” The American Enterprise Institute’s Michael Strain emphasized, “Even edging close to defaulting is dangerous,” and with as much as a temporary default, the “unthinkable might happen.”
Congress’ past enactments, not President Biden’s policies, are why the debt limit needs to be raised
Minority Leader McConnell and his allies are trying to renounce their responsibility for the need to increase the debt limit and lay it on the shoulders of President Biden and the congressional majority. On August 5, McConnell declared that Democrats “won’t get our help with the debt limit increase that these [their] reckless plans will require.” McConnell’s comments were flatly misleading and hypocritical.
When President Biden took office, it was inevitable that the debt limit would need to be raised this fall. The law that Congress passed and then-President Donald Trump signed in August 2019 suspended the debt limit for two years, providing that it would come back into force at the amount of debt outstanding. Accordingly, on August 1, 2021, the debt limit came back into force at a level of $28.4 trillion, meaning that the Treasury Department cannot increase the amount of outstanding debt any further. It was preordained in 2019, therefore, that the future treasury secretary would have to deploy “extraordinary measures” this summer to stave off default for a short period. It was also preordained that Congress would then have to raise the debt limit to avoid default.
McConnell implies that President Biden’s policies have created the need for the debt limit increase. But only a small fraction of total U.S. debt subject to the limit—about 3 percent—was incurred after Biden took office on January 20, 2021. (see Figure 1) By contrast, 27.5 percent of the debt—or $7.8 trillion—was incurred during President Trump’s term.
In February 2021—before President Biden signed any economic legislation—the debt subject to the statutory limit was on a pace to reach $30 trillion during fiscal year 2023 and approach $40 trillion by 2031.** Many of the most significant policies that set the debt on this trajectory were supported and even championed by the very members of Congress now refusing to take responsibility for raising the debt limit. These include the massive tax cuts enacted under Presidents George W. Bush and Trump; the extensions of tax cuts that President Obama and congressional Republicans agreed to; the war in Iraq; and the 20-year war in Afghanistan.
In February, President Biden signed the American Rescue Plan Act, which the Congressional Budget Office estimated to have a net fiscal cost of $1.9 trillion. That amount is much less than the COVID-19 relief enacted in 2020, which had a total net cost of $3.4 trillion. Like those relief bills, the American Rescue Plan Act is increasing short-term deficits. But much more importantly, it is strengthening the economic recovery and addressing myriad pandemic-related needs.
Moreover, Biden’s Build Back Better plan has nothing to do with the urgent need to raise the debt limit now, of course, because it has not been enacted. If Build Back Better is enacted in full, the debt would temporarily go higher than under the budget baseline but then rise at a slower pace over the long run because the additional revenue collected from high-income Americans, corporations, and tax cheats would exceed the additional long-run spending.
To be clear, the U.S. debt itself is not anywhere close to an urgent problem; in fact, the United States enjoys negative real interest rates on its debt, and the government is paying very low interest relative to gross domestic product. But political brinksmanship over the debt limit could become a serious problem for the U.S. and world economy if Senate Minority Leader McConnell and his colleagues continue their reckless threats.
Seth Hanlon is a senior fellow for Economic Policy at the Center for American Progress.
Galen Hendricks, a former research associate at the Center, and Nick Buffie, a policy analyst specializing in federal fiscal policy on the Economic Policy team at the Center, also contributed to this column.
* Correction, September 13, 2021: This column was updated to correctly state the number of times Congress raised or suspended the debt limit on a bipartisan basis since 2011.
** Author’s note: Even if the debt were “stabilized”—that is, not increasing relative to the size of the economy—the debt limit would still need to be raised periodically because the statutory limit is expressed as a nominal dollar amount.
The $28.4 trillion in debt subject to the limit also includes more than $6 trillion in intragovernmental debt—money the government owes itself. The “debt held by the public” is the better measure of the United States’ debt. It is currently $22.3 trillion, or about 98 percent of annual gross domestic product (GDP).
Furthermore, given that the interest on the debt has fallen relative to the economy even as the debt has risen in recent years, economists Jason Furman and Lawrence Summers suggest that projections of the government’s real interest costs provide a better gauge of the United States’ fiscal capacity than the debt-to-GDP ratio—and that by that measure, the country has ample capacity to make new investments.