Debt Ceiling Drama

The worst impasse over the U.S. federal debt ceiling occurred twelve years ago. Worries escalated in markets and Capitol corridors until an accord was reached at the 11th hour, narrowly avoiding a default by the U.S. Treasury. Disappointed by Congressional dysfunction, Standard and Poor’s downgraded U.S. federal debt on August 5, 2011.

That episode has proven very costly for the American public, in a number of ways. So it is an understatement to say that the prospect of going through another debt ceiling debacle is not an exciting one. Nonetheless, discussions I had in Washington this week suggest that we are headed back to the brink.

At the outset, it is important to acknowledge that America’s finances are not in the best condition. As we discussed here, pandemic programs (however necessary) added substantially to the national debt, which was on an unsustainable trajectory in the first place. We warned that pending increases in interest rates would make the situation even less comfortable, as debt service payments are absorbing a growing share of Federal revenues.

We’ve written about the debt ceiling on a number of occasions, most recently here. The United States is the only country that has this feature; others view the issuance of debt as a mathematical byproduct of the spending and tax measures passed by legislatures. Supporters of the ceiling say it creates opportunities for important discussion of government expenditures. Detractors note that little has been produced by debt ceiling debates, other than impressions that the United States cannot get its fiscal house in order.

As we anticipated when we analyzed the 2022 election results, the debt ceiling looked to be one of the few levers that the House of Representatives could pull to affect federal spending. The balloting that ultimately elected Kevin McCarthy as the Speaker of the House hinged on a small group of budget hawks, who extracted a stiff price for their support: a pledge to include steep cuts in outlays as part of any agreement to raise the debt limit.