The US is an unusual country by western standards in many respects, but perhaps in one way more than others: It is the only western country where the amount of money that the Government may borrow is limited in law. All countries are limited, of course, in how much they can borrow, but that limitation is usually imposed by the markets themselves, rather than the country’s laws: keep borrowing, and eventually, the lenders will doubt your ability to repay, the bond interest rates will shoot through the roof, and you’ll have a debt crisis.
In America, though, it is different: Though the sheer scale of the US national debt is mind boggling (Thirty one and a half trillion dollars at the time of writing), the markets have not expressed any doubts about continuing to lend to Uncle Sam.
No, the problem is that US debt is limited by law, under something called the debt ceiling. At the moment, that debt ceiling by law is thirty one trillion, four hundred billion dollars. If you are reading closely, then, you will know that in recent days, the US debt exceeded the debt ceiling. It did so on January 19th, to be precise.
What this means is that at present, it is illegal for the US Government to borrow any more money. This will not be a problem until about June, because the US Government can jiggle around its taxes and money kept in various pots, and keep the show on the road until then. But if US legislators do not change the law by June, increasing the amount of money the Government can borrow, then the world’s biggest superpower will run out of road, and the Government will have to shut down. Or worse, default on its debts.
Traditionally, this has not been a problem – there is normally some brinkmanship in Congress, but, in the end, the debt ceiling gets increased because everybody knows the consequences of the US Government failing to repay a loan.
Until now.
America’s Government – since the mid term elections last year – is divided. Democrats control the Presidency, but Republicans control the House of Representatives, which must vote in favour if the debt ceiling is to be increased. Republicans do not wish to do this without, they say, the Democrats accepting the need for huge spending cuts.
The problem though is that Republicans, thus far, have been unwilling to specify which spending they want to be cut. The US Government’s largest single outlay is on defence and the military, but Republicans do not wish to cut this (except in some cases where they wish to cut aid to Ukraine, but that is a trifling amount in the context of the debt ceiling issue). The next largest outlay is on what Americans call “Social Security” and the rest of us call pensions. Republicans do not wish to cut that either, on the grounds that doing so would lead to electoral oblivion at the hands of angry pensioners.
The other option is to raise taxes, which the Democrats favour, and the Republicans oppose. In fact, Republicans still wish to cut taxes, to stimulate the economy.
Anyway, in years past, this would all be resolved with some sort of accounting fudge: The Democrats would agree to cut spending in future years, with those spending cuts then falling by the wayside at the mercy of “events” – Covid and so on. Or Republicans would secure a tax cut based on the notion that the cut would grow the economy and “pay for itself”, and then events – like a recession – would intervene.
But this time, there appears to be little appetite for a fudge.
In fact, both sides appear to be refusing to negotiate.
The smart, conventional wisdom take on all of this is that in the end, there will be a fudge like there always is, and business will continue as usual. But there are also reasons to believe that this is wishful thinking.
For one thing, the dynamics of US politics have changed: Polls show that Republican voters do not wish to increase the debt ceiling at all. Several groups and individuals have pledged to launch primary challenges against any Republican who votes to do it.
While interpreting polls is tricky, it is increasingly clear that there exists in the US electorate a section of voters who would rather blow the whole system up and destroy it, rather than save it, on the grounds that the system is no longer working for them. These voters have powerful representatives in Congress, and the support (for either genuine, or tactical reasons) of Donald Trump. It is practically assured that any Republican who, in the end, votes to increase the debt will be denounced by these people – including possibly Trump – as “weak” and “surrendering”.
When you pair this dynamic with the fact that the Republicans have yet to even stake out an opening position for any negotiation, the reasons to worry mount.
The consequences of a prolonged US Government shutdown – or worse yet, a debt default – on the world economy cannot be understated. In years past, this would have been avoided at all costs. The conventional wisdom says that it still will be.
And conventional wisdom is usually correct. Until it is not.
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The latest episode of “The Week that Really Was”, featuring John McGuirk and David Quinn discussing the topics of the week, can be found here, as well as on all the normal podcast platforms.
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