Some of you had me for principles. In that class, I sometimes sent you off to look at this blog so that my posts could do double-duty. In this case, I actually wrote this for principles and have copied it over here for you folks.
For some of you , the debt ceiling was a topic I covered in your 2020 class, and this might be a little repetitive. But still, required for everyone.
I'm posting this pretty close to class, so we'll cover this one on Monday. And maybe another one too.
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Once again, the debt ceiling is in the news. Go ahead, google "debt ceiling news". I got almost 2 million hits. The Wall Street Journal generally has the best coverage of macroeconomic issues, so here's one of their pieces on this entitled "U.S. Nears Debt Ceiling, Begins Extraordinary Measures to Avoid Default."
It's going to be this way your whole life. It is an issue that only goes away temporarily. So much so that you could estimate each time how much breathing room they've given themselves until it comes up again.
My guess for this time is that they stretch it out all spring, and then do a quick fix that pushes it off until early 2025.
What is going on this week is the the (U.S. Department of the) Treasury is going to start using some "extraordinary measures" to avoid hitting the ceiling this week, but those will only last about 4-5 months. This doesn't mean much more than the standard things you do when you're short of cash: figure out which bills have to be paid first, pay them, and start stalling a little on the others.
First off, do not panic or overrate this, or listen to people who do. The government isn't broke, and it can pay its bills.
Secondly, panic a little. In representative democracies, parties with slim majorities tend to get dominated by their stupidest/craziest members. It happened to the Democrats over the last 2 years (with a 216-213 majority 2 troublemakers can control things), and it's going to happen with Republicans over the next two (with a 222-212 majority, 5 troublemakers can control things). It's a common enough situation that both managerial economics and political science teach about "hostage negotiation" (which in this context means a vote or decision is being held hostage, not a person). So yeah, it's possible they may try and screw things up.
Third, part of that is going to be finding our sensitive spots, and manipulating them until one side gives in. For example, a few years ago, they "addressed" the lack of an agreement on the debt ceiling by closing all the national parks down until an agreement was reached. It worked. It always does. If it sounds like an unstable person engaging in self harm to get attention ... you're starting to get how this works.
The situation is that our government is set up with checks and balances. The legislative branch (Congress) decides on the amount of spending and taxes. But the executive branch (the Treasury) actually does bill paying. Just like you, if outflows of money exceed inflows, the difference must be borrowed. But the legislative branch sets the limit (a ceiling) on how much the executive can borrow, including all the past borrowing that hasn't been paid down (the national debt). What has happened this week is the Treasury has told Congress they need to raise the debt ceiling, or they'll have to cut spending or raise taxes. Legislators don't like to do any of those three.
Let's draw an analogy. Imagine an actor who's pretty good at doing things to make money flow in, but even worse at buying stupid stuff. (Ooh ooh, we don't have to imagine, it's a thing: we can just use Nicolas Cage as an example). Now suppose he has a manager that pays all his credit card bills by
check. Every once in a while the manager calls Cage and tells him if I send the check this time it will bounce. But maybe in the short-run I can pay the bill on one card with the other, and get away with that for a few months. And Cage's response in the longer-run is to find a card with a higher credit limit at the last minute.
More formally, this is how Jason Furman, an economist from the Obama administration explained it on NPR on Wednesday:
Congress has to give Treasury permission every time it goes out and borrows money, which it has to do quite a lot because we spend more than we collect in taxes. Starting about 100 years ago, they gave a blanket permission that you can borrow up to a certain amount, and you can't borrow past that even if you're borrowing money to pay bills that Congress itself passed a law saying you have to pay.
If it sounds ridiculous, it sort'of is.
Back in the 1970's, Congress passed a law governing how it works that separated the spending amount from the tax revenue amount. And spending is usually bigger because raising spending gets you votes and raising taxes does not. So they don't have to match up, and they usually don't. Borrowing makes up the difference.
But, here's another one of those bits of "folk macro" that most of you have. And most people have this completely backwards. The reality is that the U.S. government is the best and most reliable borrower the world has ever known. In short, everyone wants to loan it money. All. The. Time. The "folk macro" is that people think there's a limit on this. There isn't. All I can tell you is that the limit is so huge no one is even sure it exists. So much so that claiming there's a limit is a good sign the speaker really doesn't know what they're talking about. But like all folktales, try telling a true believer that Mike and Sulley are not in their closet, or Randy isn't under their bed.
I do think we're going to see a nasty political fight over the next 4 months. The Republicans, as a party, are convinced the government is too big. And stalling on the debt limit is one way to force others to vote for some spending reduction.
And, we've had a big spending blowout over the last 3 years, so there's certainly an argument to be made that they can back off some things.
In fact, you can probably view it as incompetence on the part of Democratic Congressional leadership that they didn't get the debt ceiling increased before the elections.
Lastly, another piece of "folk macroeconomics" that people get wrong is the idea that the Republicans hate spending and will cut it by much. I will admit that the Republicans prefer spending less than the Democrats. But not by much. The sentiments of the two parties are a lot closer to each other than they are to you and me. And the job of member's of Congress is to spend other peoples' money: who'd want to do less of that?
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