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.
Related reads and resources
- The debt ceiling explained
- A 2021 piece that explains what the debt ceiling (a.k.a. debt limit) is, and what could happen if the United States defaults on its obligations.
- The origin of the U.S. debt ceiling
- A brief history of how the debt limit became a thing. Hint: it's political.
- How worried should we be if the debt ceiling isn’t lifted?
- Brookings gives us the best-case and worst-case scenarios for a United States government default.
- Why is it so hard for Congress to deal with the national debt?
- TL;DR: In order to deal with the national debt, some Americans have to pay more in taxes and some spending needs to be cut. Unfortunately Congress can't agree on who should pay more and where we should spend less.
- Learn how the government gets the money to pay for things.
- Find out where the government spends the money it gets.
It's probably fairer to say low-wealth people, not poor people. Student loan borrowers, might well have high incomes to go with their high debt. ↩
Did you know that some state governments pay corporations millions of dollars to administer programs that get people on welfare to work, but not into paid employment that can move them out of poverty? Wisconsin, for example, pays millions of dollars to corporations so they can restrict which poor people get money instead of just giving poor people money. I didn't know this either I listened to season 6 of The Uncertain Hour. I highly recommend it. ↩
I reserve the right to be wrong. The current version of the Limit, Save, Grow Act is hard to read because it references other areas of the United States code. ↩
The increase in yields for those bonds means that the price of those bonds have dropped. Anyone selling those bonds is likely selling them at a loss. I am choosing to keep my bonds until they mature. ↩