Raise the (debt) roof … erm, ceiling!

Late last week, House Speaker Kevin McCarthy unveiled the Limit, Save, Grow Act of 2023 (PDF link), a bill that says its goal is to To provide for a responsible increase to the debt ceiling, and for other purposes. Other purposes, meaning “undoing the Inflation Reduction Act,“ “making climate change worse,” and “punishing poor people”¹.

I made it as far as the table of contents before seeing red. Proposed measures would undo what little national climate policy we have. They'd undo student loan forgiveness. They'd reduce the ability of the Internal Revenue Service to collect revenue and process refunds in a timely manner by cutting IRS staff and budget. They'd also impose work requirements for welfare recipients. Work requirements do absolutely nothing to help people leave poverty, but they do make some corporations very rich.²

This would be a terrible compromise. Spending cuts are something to debate when setting a federal budget, not when discussing whether the United States is going to pay its current obligations. I also don't think their proposed policies are good for the country.³

Congressional dilly-dallying has introduced uncertainty into the market. We're seeing it in bond yields. Right now, yields for short term treasuries are higher than yields for longer-term treasuries. Yields for bonds that mature in July 2023 are particularly high.⁴ Why? Market watchers and economists think the government would run out of money in June if Congress doesn't raise the debt limit.

What is the debt limit?

According to the U.S. Department of the Treasury, the debt limit is:

[t]he total amount of money that the United States government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments.

Congress obligates the government to pay for certain things. Then the government uses a mix of tax revenue and borrowed money — savings bonds, treasury bonds, treasury bills, and treasury notes — to pay for those things, up to the limit imposed by Congress. The debt limit is wholly political, as is our failure to address both the debt limit and government spending.

When Congress refuses to raise the debt ceiling, the government borrow money to pay for what Congress has obligated it to pay. In a worst-case scenario, it can lead to a debt default.

What happens when governments default?

For the United States, a debt default could range from awful to catastrophic. Quite a bit depends on:

how long the default lasts;
whether the government makes interest payments on time; and
whether the government repays debt principal.

According to Brookings, in a best-case scenario, we'd experience an economic slowdown. Federal employees might not receive their pay on-time. Retirees might not receive their Social Security checks on-time. Individuals and institutions that hold government debt would still receive interest payments.

The government could continue to borrow at the same level by auctioning new securities for the same amount to pay the principal for securities that have matured. Unfortunately, they'd have to pay much higher interest rates for the privilege.

Eventually the Treasury might not be able to make interest payments or repay loan principal. If that happens, pretty much everyone who holds any government securities — individuals (me), banks, foreign governments, and probably the mutual funds in your retirement plan — would be at risk of not having their money when they need it.

Ultimately, the United States would lose its reputation as a safe haven for investment.

I hope that financial self interest wins out. After all, most members of Congress are both directly and indirectly exposed to U.S. government debt. So are a good number of the donors who fund their campaigns. Let's hope that the threat of economic calamity and the social dislocation that would ensue forces Republicans in Congress to stop playing games.

Raise the debt limit already.

What is the debt limit?

What happens when governments default?

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