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DEBT DEBACLE

Washington clash over debt ceiling bears critical consequences for US security and global interests

Washington clash over debt ceiling bears critical consequences for US security and global interests
(Photo: Unsplash / ENgin Akyurt)

The US debt ceiling debate has become the central issue in today’s US politics. Although some might see it as an arcane squabble among politicians, there are real enough consequences for the world.

The US political universe is seized with an enormous crisis largely of its own making, even as it almost defies understanding by most people — perhaps even by many of the participants in this debacle.  

The theory of US government budget-making seems very different from what is going on now. In the textbook version, the chief executive — the president — proposes budgets for all of the executive departments, and then the Congress (initially within the House of Representatives as the body closest to the country’s citizens since its members are elected every two years and their districts are apportioned by population) debates and then disposes of these proposals.

After both houses of the national legislature reach agreement, the budget or individual department budgets go to the president for his approval (or possibly a veto). Non-government organisations engage lobbyists or do their own work to influence how their views become programmes that spend money. As a result, they expend much time and effort pushing for specific changes in budget bills and in the corresponding enabling legislation that establishes programmes or staffs them. 

In the contemporary US, however, things are no longer that simple. For many years now, budgets are not passed until the fiscal year has virtually come to an end. When this happens, a series of continuing resolutions is passed — acrimoniously — to allow government departments to continue operating. Operating means spending money for salaries, programmes, procurement, and all the rest of the things governments are supposed to do. In this scenario, an omnibus budget is finally passed just as the fiscal year ends, reconciling the spending approved under those continuing resolutions.

In most cases, continuing resolutions do not allow for spending beyond a significant percentage of the previous year’s spending. But this process can eventually mean spending at the end of a fiscal year in a helter-skelter, near-heedless manner, because US government budgets generally do not carry over to a subsequent fiscal year. And no government department in history has ever wanted to return unspent money to its finance ministry, exchequer or treasury department. Ever.

A multifaceted battle

Tax code changes similarly begin in the House of Representatives, but here the battle is usually a multifaceted, multisided one between the executive and Congress (and between parties and factions within parties) over any changes because a tax code is never neutral. Somebody must pay taxes, and the manner of the rates or the levels for such taxes is crucial to many people, organisations and interests. 

This is where lobbyists become important since they represent groups or interests with pressing interests in gaining some kind of change in their tax treatment — usually by gaining special breaks in the way the tax code handles their earning, receiving, keeping hold of or spending money — and what they spend it on, absent tax consequences. 

Back in 1917, as the US was about to enter World War 1, a new wrinkle was added to the US federal government’s budgetary process — the debt ceiling. Because the country was about to embark on a steep rise in spending on the war effort, this measure was meant to ensure Congress required an agreement to authorise the issuance of any new debt.

Since one major way the US government, like any other government, finances its business beyond gaining tax revenues comes from issuing debt — otherwise known as sovereign debt bonds — on international and domestic markets, a debt ceiling was meant to ensure it would issue these bonds needed to cover expenditures already authorised and appropriated through the budget process. It is crucial to note this debt ceiling is not designed to provide a cushion for new ideas about spending, but, rather, to allow the government to take on new debt to pay for programmes that had already been approved and budgeted for by congressional action.

Absent any assumption of new debt, the government essentially runs out of money by a certain date, precisely because the US government is, at the margin, funded through debt. The government has usually been in a yearly deficit of spending over revenue and so new debt is crucial.

This mechanism is really only effectively duplicated by one other nation — Denmark, and there the debt ceiling is set high enough that it has never created the kind of crisis the US government has tangled itself in now. (For clarification, in the US, individual state governments are generally not allowed to finance routine operations through debt funding — a reason for the variety of special purpose vehicles they use to raise funding for specific projects through special bond issues such as new highways or other infrastructure.)

Most of the time, raising the debt ceiling has been a largely routine exercise — except when it isn’t. As is the case now. The Republican majority in the House, led by Speaker Kevin McCarthy, largely embraces the position of the so-called Freedom Caucus that the debt ceiling will only be raised if there is also an accord for some draconian cuts in all of the government’s programmes. Those cuts are being mooted in a broad-brush, simplistic, across-the-board, percentage-cut style.

For many people, not just President Joe Biden and the Democratic Party’s majority in the Senate and its caucus in the House, the Republican proposal ignores the specifics of each programme, does violence to the will of the Congress that had been expressed by authorising the programmes and spending, and that, further, effectively falls largely on social welfare programmes — including supporting demands such as for harsher measures before people can qualify for various benefits.

Budgetary game of chicken

By contrast, the Democrats are pushing for what is called a “clean bill” on the debt ceiling. With that, there should be a return to the more traditional way of determining which programmes to support or cut, and by how much, as well as having a proper debate over raising taxes — including closing some of the more egregious but politically potent loopholes and reconfiguring how the incomes of very rich people are treated under the tax code.

As The Washington Post described this budgetary game of chicken, “There’s still no deal in place for Congress and the White House to avoid a catastrophic default on the nation’s debt. But even as talks continued into the weekend, one thing was already clear: Many Republicans and Democrats don’t like the deal, whatever it is.

“On the right, the House Freedom Caucus has called for an end to negotiations over the debt ceiling entirely, saying ‘there should be no further discussion’ until the Senate acts on a House bill that would raise the borrowing limit while sharply cutting federal spending. On the left, a growing coalition of Senate Democrats are calling for President Biden to prepare to invoke the 14th Amendment, pushing for a unilateral — but potentially risky — move that would sidestep the close circle of negotiators trying to hammer out a compromise. House Democrats are trying their own long-shot bid to raise the debt ceiling without spending cuts, circulating a petition that could force a vote.

“In the middle, negotiations broke down for much of the day on Friday, before resuming later in the evening. With the clock ticking toward a possible June 1 deadline, the two sides still seemed far apart. The White House offered to limit defense and nondefense spending, but Republicans objected, saying the administration’s proposal didn’t cut the long-term national debt enough, three people with knowledge of the matter told The Washington Post, speaking on the condition of anonymity to describe the private talks.” 

By the time you read this, it is possible the gap between the sides may have become even wider, given the lack of any sense of flexibility on the issue by the combatants.

This talk of using the 14th Amendment to the Constitution to deal with the debt ceiling is by largely ignoring the ceiling. Historically, the amendment has usually been read as the post-Civil War amendment dealing with the citizenship of former slaves, but it also ensured the public debt incurred in defeating the South could not be repudiated.

It said in part, “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned…”

A ‘hail Mary’ pass

Still, most officials see this idea for the current imbroglio as a kind of governmental “hail Mary” pass to avoid a debt default rather than a logical way out of the mess. Others have suggested the government simply issue one or two $1-trillion platinum coins and deposit them with the Federal Reserve Bank. This would allow more debt to be issued against those bits of precious metal. There are others who are urging the president to ignore the question entirely and just pay the bills and see where things go from there (presumably to the courts for prolonged litigation and lots of uncertainty).

In most circumstances, this legislative tussle might be seen as the 21st-century US equivalent of a mediaeval monastic debate about how many angels can dance on the head of a pin. But, according to the treasury’s calculations, without a rise in the debt ceiling, by 1 June, the country’s federal government revenues will run out, without the borrowing.

Donald Trump’s flip comment the other day during his CNN town hall that the default should happen this time (he’s no longer president so it is no skin off his nose) to provoke some kind of solution on drastic spending cuts clearly has not had a positive effect on the situation, especially since in his administration there was little dispute over the periodic debt ceiling increases. If, or when, that default should happen, even the optimists are whispering about a cascade of baleful but unpredictable repercussions — on stock exchanges, on foreign exchange markets, on the ability of the federal government to pay its bills (including government employee salaries and social security payments), on interest rates banks will charge given the higher levels of insecurity in the economy — and then on through to the veritable collapse of civilisation and a new dark age.

Even without the worst consequences, the default will have impacts on international relations beyond these economic and financial issues. This snarl and the lack of an evident compromise between the president and Speaker of the House (and the Republican congressmen and women pushing him closer to the precipice) and the fact that the default date looms ever closer, has meant Biden cut short his Pacific visit for the G7 meeting and visits to Papua New Guinea and Australia. The US debt ceiling debacle vied for the attention of the G7 leaders meeting in Hiroshima with the continuing fighting in Ukraine from the Russian invasion.

For conferees, the question of the US’s ability to govern itself, let alone its ability to manage its finances appropriately, was front and centre in their thinking and discussions. But because of his now shortened trip, the president could not help but make Australians contemplate the US resolve in building a strong, multination partnership to counter China that included the Aussies as partners. Moreover, it also produced real disappointment among many in the smaller South Pacific nations when the Papua New Guinea visit evaporated. That visit had been designed to showcase US engagement in the South Pacific, after years of benign neglect, even as the Chinese have been consolidating their presence on a number of those islands.

One wonders if Republican partisans of the failure to pass a new debt ceiling recognise the impact of these Washington budget battles on the country’s larger security posture and interests. Or perhaps they simply don’t care, preferring, instead, to protect oil company profits from even the possibility of any new taxes and to cut back eligibility for Snap, the fancy acronym for food stamps, that supplement the grocery bills of the poor. If so, that is one heckuva message to send out into the world. DM

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