Caught in a debt trap

For the 20th time since 2001, the United States has bumped into its debt ceiling, stirring up dire warnings from politicians about the country’s economic future.

For now, the United States is staying out of default by employing what the U.S. Treasury describes as “extraordinary measures.” Those measures, consisting of shifting funds from one agency to another and putting off some investments, should allow the country to meet its financial obligations until June or July. Eventually, the Treasury will hit an “X date”—a point at which it will be unable to make payment.

Between now and the X date, Congress has a few options. It can vote to amend U.S. Code Section 3101.B and put a new hard limit in writing or suspend the limit temporarily. Congress has used both methods frequently in the past 10 years.

Negotiations between President Joe Biden and the Republican-controlled House of Representatives will likely determine what strings, if any, come attached to a decision to increase the nation’s debt.

Jared A. Pincin, an associate professor of economics at The King’s College, believes that the best change the government could make would be to limit federal deficit spending.

“The United States is running trillion-dollar deficits,” Pincin said. “Let’s just say they raise the debt limit by $4 trillion. If they do nothing else, we’re having this exact same discussion 3½ years from now.”

The government could also eliminate the limit altogether. In 2021, a handful of lawmakers introduced a bill to remove the cap, an idea supported by Treasury Secretary Janet Yellen but opposed by President Joe Biden. Its supporters argue such a change wouldn’t substantively alter the nation’s debt, only remove the risk of default.

Pincin doesn’t think that’s a good idea. Completely removing the limit would only encourage lawmakers to treat the debt a little more casually.

“I would rather raise the limit than suspend the limit,” Pincin said. “What we saw when they suspended the limit last time was no regard at all for debt. I also wouldn’t cap it and call it a day. If Congress decides to go down that route, they have to figure out how we’re going to cut spending or raise revenue or both.”

House Speaker Kevin McCarthy, in his bid to become speaker, promised many in his own party that he would work to lower spending and fight a debt limit increase. He also promised not to include Social Security in any negotiations over budget cuts.

Biden says that negotiating spending cuts before addressing the debt ceiling is a nonstarter.

“Raising the debt ceiling is not a negotiation; it is an obligation of this country and its leaders to avoid economic chaos,” the White House said in a statement last week.

In 2011, the United States got fairly close to defaulting on its obligations when, in a similar situation, the House of Representatives and its Republican majority demanded a reduction in spending. Congress eventually approved a budget increase but not before Standard & Poor’s, a global rating agency, knocked the United States down from its perfect AAA rating to AA+.

“Nothing tangibly changed in 2011, and the AA+ rating was really a media hype event, not a substantive financial one,” said David Bahnsen, founder and managing partner at the Bahnsen Group. “Yields on the debt did not go higher, and, in fact, in the years that followed, went much lower. In other words, the financial markets shrugged it off.”

The agency’s change in rating stemmed from the United States’ lack of a long-term plan to deal with its growing debt, Bahnsen said. He noted that the debt has doubled since then, but the country’s rating remains the same.

“The government has not shown any plan to rein in the long term debt picture. On current projections—just paying interest on the debt—roughly by the end of a decade, we will be paying a trillion dollars,” Pincin said.

At some point, paying back the interest could become a larger and larger component of the problem it’s used to solve: spending needs that exceed national revenue. Last fiscal year, the U.S. interest payment on its debt was an estimated $400 billion, according to the Congressional Budget Office. That’s about 8 percent of the government’s total revenue for the year.

In the short term, as long as the country doesn’t default, the United States is not in danger, Pincin said. But the lack of a plan remains.

“You can’t run unsustainable debt forever,” he said. “At some point there comes a time where you’re not going to be able to borrow on favorable terms.”