Would you lend money to someone who told you: “I’m going to keep on borrowing until my debt reaches X dollars, and then I’m going to default?” I don’t think so. But that’s what the U.S. government has been doing, year in and year out, and yet there has been no shortage of people willing to buy U.S. Treasuries. As long as Congress periodically raises the debt ceiling, this arcane rule—which is shared by very few other countries in the world—need not sully the Treasury bonds’ promise as the world’s safest and most liquid asset. And the world’s investors know that Congress will certainly raise the ceiling because it would be irrational not to raise it, as failure to do so would trigger default and financial chaos.
The faith of global investors in the rationality of Congress and the sanctity of the U.S. Treasury bond, while never broken, has been periodically tested and even shaken. Most notably in 2011, Congress’s trip to the brink of the abyss led the government’s credit rating to be downgraded from AAA to AA+. Another time of testing is now upon us. According to Treasury Secretary Janet Yellen, the limit will likely be reached sometime in October, requiring another debt ceiling increase if the U.S. government is to meet its obligations. And if any investors still retain their faith in the rationality of the U.S. political system after the events of the last year and a half, well, God bless’em!
To be clear, the political class is as rational as ever. No one has ever accused Mitch McConnell, who has committed Senate Republicans to vote against lifting the debt ceiling, of acting under anything except naked self-interest. But many of the voters seem demonstrably crazier than they were back in 2011. How else to explain: (1) the roughly 25 percent of the eligible population that have foresworn Covid-19 vaccinations, even as shortages of horse-wormer medicine have emerged amid a spike in pandemic hospitalizations and deaths; (2) governors who find it politically advantageous to strenuously oppose mask requirements by local governments and school districts in their states; and (3) polls that indicate 29 percent of respondents continue to believe that Donald Trump won the 2020 elections.
With large swaths of the electorate either delusionary or, at a minimum, visibly distracted by the culture wars, the pressure on the political leadership to act responsibly is much diminished and the chances of an accident—that is, an unintentional failure to raise the debt ceiling—are accordingly much greater. Everyone agrees that the consequences of a failure to raise the ceiling will be catastrophic: soaring interest rates, plummeting stock prices, a collapse in credit, and a global recession. Odds are thus that one side or the other will back down from this game of chicken, and a global financial crisis will be averted.
But even if we squeak by this time, what about next time? Our national aversion to raising taxes to pay for expanding government services guarantees that the debt will grow to meet each new limit. And neither our hyper-partisan politics nor our vulnerability to social-media-driven mass delusion appear likely to dissipate anytime soon. Accordingly, the odds seem good that if the debt limit rule is retained, repeated testing of it will eventually lead to failure, and perhaps sooner rather than later.
Clearly, the debt ceiling needs to be scrapped altogether. What could generate the political momentum to make this happen? The Republicans are not going to release their most valuable hostage out of the goodness of their hearts. Though a political backlash against debt-ceiling brinksmanship could force them to do so if the consequences became viscerally apparent. And the most plausible scenario to make those effects plain for all to see might be a temporary—maybe a few hours, or a few days—default on the U.S. Treasury’s obligations, enough to panic financial markets and drop the government’s credit rating a few more notches, but hopefully not enough to push the economy back into recession.
There is precedent for the motivational efficacy of an economic crisis: On September 29, 2008, the House rejected the TARP bailout bill; this triggered massive declines in stock prices that laid the groundwork for the House’s approval of TARP several days later. However, it is unclear whether a temporary debt default could indeed disrupt financial markets without triggering a severe economic contraction (the financial equivalent of being a little bit pregnant). And so I am certainly not advocating that our leadership deliberately engineer such a scenario. But should it happen, it would be a perfect opportunity to take the debt ceiling off the table once and for all.