Taking the debt ceiling to the brink

Taking the debt ceiling to the brink
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With the House of Representatives having passed a bill Wednesday night putting an end to the government shutdown, let’s take a look at the factors that contributed to the political deadlock that has played out over the past two weeks.

First, a more ominous threat than the debt ceiling lay behind the precarious situation. The debt ceiling has always existed as one of the powers of the U.S. Congress in controlling the spending and taxation activities of the government. Even though the executive office can sign legislation into law with a president’s signature, Congress can prohibit its funding by imposing a debt limit that caps the U.S. Treasury’s ability to finance current obligations.

Even before Congress passed a bill in the eleventh hour, the United States had already reached the debt ceiling. But Treasury Secretary Jack Lew had been able to use “extraordinary measures” to prevent the U.S. from not being able to pay for funding already authorized by congressional legislation. These measures included underinvesting in certain government funds, suspending the sales of non-marketable debt and trimming or delaying the auctions of securities.  However, these methods were set to be exhausted by October 17.

While it was highly doubtful that not raising the debt ceiling would have resulted in the U.S. defaulting on its interest payments of U.S. Treasuries, there was a concern regarding how global investors would react to the potential turmoil inflicted by the U.S. government not paying all of its bills. As stated by Daniel Mitchell of the Cato Institute, the U.S. collects tax revenues exceeding $3 trillion a year, which is more than capable of servicing our U.S. Treasury annual debt service of about $230 billion.

However, it is not enough to cover a broad range of government expenditures ranging from national defense to social spending to transportation. This disruption in funding ran the risk of affecting credit markets and dampening consumer and business spending that was already hampered by a tepid recovery.

Decision makers were left with few scenarios that they could pursue, such as either significantly raising taxes or cutting government spending, though either action would have had severe consequences to the economy in the short-run. With government funding now provided only through mid-January and the debt ceiling extended until February 7, 2014, these questions may arise again.

Federal employees, civilian contractors, educators and non-profit organizations would all likely feel the negative consequences of dramatic funding cuts. Unemployed workers and Social Security recipients would also be at risk of delayed payments or benefits. Another possibility would be the U.S. selling its financial assets to temporarily fund governmental operations, although those options carry legal and practical obstacles.

When wondering why members of Congress took so long to strike a deal, one must realize that politically astute moves did not necessarily equate to good economics, especially in the short-term. In gerrymandered House districts that are highly conservative, there were significant costs to compromising core beliefs. Voting for a clean continuing resolution that funded the federal government without defunding or delaying the Affordable Care Act came with significant political risks.

Highly financed conservative political action committees viewed negatively any vote that did not impact health care reform. Holding significant influence on campaign financing for the 2014 elections, these groups exercised considerable sway over members of Congress. That created pressure to not compromise — with the collateral damage being slowed economic growth and higher unemployment. Detrimental as these outcomes may seem, this strategy of self-inflicted wounds to the economy would have been worthwhile to some Republicans, if it had resulted in sabotaging health care reform or substantive deficit reduction.

On the other hand, Democrats were just as unyielding when considering delaying the individual mandate for a year or waiving the medical device tax. Both measures are necessary to generate the revenues needed to bring down health premium costs. That is why Democrats were hesitant to agree to any changes in health care reform that would have undercut its effectiveness.

Even though the debt ceiling has now been extended to the early part of 2014, that is still a relatively short time frame, which compromises business confidence. For now, lawmakers managed to strike a deal that will bring the U.S. and global economies back from the brink of turmoil. It remains to be seen whether Congress and President Obama will be able to formulate a more durable solution in the coming months. The U.S. economy and global markets depend upon it.

Categories: North America, Politics

About Author

Aaron Johnson

Aaron serves as an Assistant Professor of Economics at Darton State College. He holds a M.A. in Economics from the University of Missouri-St. Louis and is a regular contributor on economic analysis for local Fox and NBC news affiliates in Albany, GA.