America’s leaders are frantically debating whether to lift the debt ceiling against resistance from the Republican party. It’s absolutely mad. Why would a creditworthy country threaten to default when that would cut off vital payments for its own people, boost interest rates, harm jobs and send economies around the world reeling?
The mindless debt ceiling feud only underscores the deep dysfunction of America’s fiscal policies. Fiscal policy should distribute resources within a sustainable stabilisation framework that disciplines debt and deficits. The US fails miserably.
Fiscal fights between Democrats and Republicans over revenue and spending mean that the deficit and debt path are derivative of these battles. While fiscal rules (such as PAYGO) might create some appearance of process aimed at adhering to a stabilisation path, these are often ignored or changed. Despite excellent budgetary material from the Office of Management and Budget and the Congressional Budget Office, fiscal projections can be quite misleading. Projections arbitrarily exclude some tax measures and spending unless extended and frequently assume that provisions will lapse after 10 years.
Perhaps the most basic task of Congress is to pass a budget. But Congress appears incapable of that. Budget resolutions setting the discretionary spending envelope are hardly ever completed, let alone in the established timeline.
Congress is also to pass 12 appropriations bills to fund the government in the following fiscal year and, while a few bills may get passed, many don’t. That means feuds over government shutdowns at the beginning of the new fiscal year unless Congress passes a continuing resolution. Can you imagine sending the bulk of your workforce home, ordering them not to work until there is a reopening and then paying them for their time off? Often, unfinished bills are hurriedly lumped together well into the new fiscal year in massive and untransparent ‘omnibus’ legislation.
The fiscal debate between Republicans and Democrats is often a fantasy. In normal times, federal spending is some 20% or more of gross domestic product, and general government spending is in the mid-30s. Republicans posit that spending more would turn the US towards socialism. They argue there should be ‘no new taxes’ and efforts are made to starve the Internal Revenue Service of resources.
Democrats point to pressing social needs, such as infrastructure and climate spending (for which legislation has been finally passed under President Joe Biden’s administration), childcare and other basic social safety net elements. While citing the need to raise revenues, they are only ready to tax the rich, not the middle class. But they define the middle class as including a family earning up to $400,000 a year, while those above are only 2% of taxpayers. Neither party’s arithmetic adds up.
The US is projected to run deficits on the order of 5% to 6% of GDP annually over the next decade, if not higher in the later years. Meanwhile, net debt held by the public – now around 95% of GDP – is slated to explode over the coming decades from roughly 105% of GDP in 2030 to 180% by 2050 on the back of higher ageing entitlement expenditure and interest costs. Neither party has been willing to tackle entitlements and non-mandatory discretionary spending – the latter is roughly one-third of the budget and includes defence spending, which both parties treat as fairly sacred. You can’t squeeze blood from a stone.
The Republican party argues that threatening default is needed to secure spending reductions as a means to restore fiscal rectitude. Default is a recipe for chaos, not rectitude. How a party that cut taxes under Ronald Reagan, George W Bush and Donald Trump without significantly touching spending can claim a mantle of fiscal responsibility or that default is an act of rectitude boggles the mind.
The Treasury pays the bills that it is mandated to by Congress, with the president’s signature. Given US deficits, debt inevitably rises and the ceiling is reached. Congress waking up to the rising debt and suddenly calling for rectitude is reminiscent of the scene in the gambling house in ‘Casablanca’: ‘I’m shocked, shocked to find that gambling is going on in here.’
Undoubtedly, somehow at some point, the US will close this chapter in the mad game of chicken and lift the debt ceiling just as it has 78 times before, underscoring the absurdity of the limit as a disciplinary tool.
In the meantime, America will again appear disorderly and the chaos will undermine global confidence in the dollar and the ability of the US to manage its affairs. This is no way to run a railroad.
Mark Sobel is US Chair of OMFIF.