By Rudy Barnes, Jr.
America has once again hit its self-imposed debt ceiling, and Treasury Secretary Yellen has kicked the can down the road with extraordinary measures to avoid insolvency until June. Congress will have more time to find a solution. It could increase the debt ceiling as it has many times before, but that would only exacerbate the burden of America’s massive national debt.
In 1992, James Carville said “It’s the economy, stupid;” and that cardinal rule of politics hasn’t changed. America’s national debt is just over $31.4 Trillion, and that’s the current debt ceiling. Short of printing more dollars and devaluing the dollar, there’s little prospect that the national debt will diminish anytime soon, so it’s likely to be passed on to future generations.
President Biden has said that he will not negotiate future budgetary politics with Republicans to reach a deal on the debt ceiling, but that’s likely to change. Assuming that Republicans continue to demand budget cuts, and given the drastic consequences of failing to increase the debt ceiling, major cutbacks in spending are likely over the next few months.
New budgetary priorities will be required for a partisan compromise to increase the debt ceiling. Popular domestic programs will be competing with each other and with foreign aid to Ukraine under the cloud of America’s massive national debt. It’s past time for a polarized Congress to provide the budgetary priorities needed for America’s future economy.
Everything is on the table, but it’s unlikely that popular domestic programs like social security or medicare will be cut, while the $ billions in aid to Ukraine will likely be cut. Biden’s stated refusal to negotiate with Republicans and a history of ignoring long term economic issues when considering the debt ceiling make the future resolution of the budget uncertain.
The economy’s GDP increased by 2.9% in 2022, but so did consumer debt. An erratic stock market forecasts economic uncertainty and a possible recession. America has promised continued massive aid to Ukraine, including 31 Abrams MIAI tanks. Russia has launched a new offensive in Ukraine, but it will be months before American tanks reach that war zone.
Inflation seems to be easing, but lingering in the background are endemic economic disparities reflected in a volatile stock market that’s a barometer of the economy for the rich, but not for the rest. If predictions of a recession materialize and the stock market crashes, there is a likelihood of another round of economic assistance that will exacerbate the budgetary crisis.
The increased GDP for 2022 came at the expense of increased consumer debt and prospects of a recession. As Congress grapples with the debt ceiling over the next few months, the only certainty is economic and political uncertainty; and it’s not likely to be resolved quickly and painlessly as in the past. That leaves America’s economic future hanging in the balance.
There is no easy escape from America’s debt-ceiling mess. Defaulting is unthinkable, but the “workarounds” to avoid default bring their own dangers. “Republicans, who have newly taken control of the House of Representatives, say that they cannot abide runaway spending and must rein it in. This deep concern appears episodic. When Donald Trump was president, the debt ceiling was increased three times with Republican support, and the national debt rose by $8trn over his term ($3.2trn of which came before covid-induced spending began in 2020). Those increases were not particularly contentious, and the White House wishes the same for this one. “Raising the debt ceiling is not a negotiation; it is an obligation of this country and its leaders to avoid economic chaos,” Mr Biden’s press secretary said in a statement released on January 20th. But it may not be so simple. Republicans are unlikely to let their leverage over Mr Biden lapse. Kevin McCarthy has vowed to secure spending cuts in exchange for raising the debt limit, and pledged to put the country on the path to a balanced budget in a decade. As part of his bargain to attain power, the beleaguered speaker also had to allow a parliamentary maneuver that would make his own removal easier. Mr McCarthy may not be able to keep his promises, in which case his own party could end his speakership in its first year. This is forcing financiers, lawyers and officials to focus on the unthinkable. The starting point of such contingency planning is that a sovereign default would be cataclysmic: in all likelihood stocks would plunge, borrowing costs would soar, growth would suffer and the dollar’s status as the world’s dominant currency would be shaken. Any way to avoid this series of disasters merits attention. The problem, unfortunately, is that each proposed workaround has severe—and quite possibly unworkable—drawbacks.
There is no way to improve America’s fiscal trajectory without restructuring its entitlement programmes, which some Republicans are keen for and Democrats will never accept. The result may be that the kind of self-imposed austerity that plagued the Obama years makes a comeback. At the moment, neither side has any incentive to back down. Impending market cataclysm might be the only motivating factor, though it will not arrive for several months. Trillion-dollar chicken has a while yet to go.” See United States | Trillion-dollar chicken at https://www.economist.com/united-states/2023/01/23/there-is-no-easy-escape-from-americas-debt-ceiling-mess.
Every American could feel the pain of Washington’s next showdown. “Republicans are demanding significant spending cuts in return for fulfilling the routine duty of allowing the government to borrow more money now that its credit limit is reached. But the White House is refusing to negotiate. If the standoff lasts until a drop-dead date in the summer, it could trigger a financial and stock market cataclysm and crash the retirement savings of millions. The government might also not have enough cash to pay Social Security payments, federal workers or veterans’ benefits. This is no way to run an economy. Or a country.” See https://www.cnn.com/2023/01/19/politics/analysis-debt-ceiling-showdown-risks/index.html.
Why we have a debt ceiling, and why this trip to the brink may be different. See https://www.npr.org/2023/01/21/1150078028/debt-ceiling-explainer.
NBC News has reported that Biden has reversed his earlier position and will send 31 Abrams MIAI tanks to Ukraine, and Germany says it will send an initial shipment of 14 tanks to Ukraine. See https://www.nytimes.com/live/2023/01/25/world/russia-ukraine-news. But whether these sophisticated tanks will actually benefit Ukraine’s battlefield chances, success or failure will depend on extensive training and a plentiful flow of western arms and ammunition. See https://www.ft.com/content/7a545cda-3dd8-408d-b676-0977d0b204db.