The unique absurdity of the U.S.’s looming debt default

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In Washington, the standoff is reaching a white-knuckle moment. In a matter of weeks, the United States could be on the verge of a historic debt default, an act of self-sabotage that has huge implications for the country as well as the global economy. President Biden remains at odds with House Republicans, who are using a looming deadline in early June to raise the national debt ceiling as a means to extract concessions on government spending.

Biden cut short a trip to the Asia-Pacific region, scrapping visits to Papua New Guinea and Australia, to continue negotiations with House Speaker Kevin McCarthy (R-Calif.). As the impasse drags on, the Treasury Department is reportedly looking at ways in which federal agencies can make upcoming payments at a later date in a bid to conserve cash. “Without additional borrowing, a fresh burst of tax revenue or new ways to slow spending, the federal government expects to miss a payment for the first time in modern history in early June,” my colleagues reported.

The United States is one of a tiny number of nations to impose a hard cap on public borrowing, which in its current aggregate form was first put in place in 1939. Though this is hardly the first time a political party has sought to weaponize the threat of default, Democrats accuse their Republican counterparts of cynically using the mechanism to derail Biden’s agenda and slash public spending through legislation they would otherwise struggle to pass. When in power not long ago, Republicans had far fewer qualms raising the ceiling and blowing past earlier borrowing caps.

“The issue here is principle: If you accept the idea that you can, in essence, be held to blackmail with the debt ceiling, it will be done again and again. Not to be crass, but it’s essentially negotiating with terrorists who have taken hostages,” said Dean Baker, an economist at the Center for Economic Policy and Research, a left-leaning think tank, said to my colleagues. “More and more people in progressive circles are becoming concerned with it.”

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Officials elsewhere are growing concerned about the potential harm caused by the crisis. “I just cannot believe they would let such a major, major disaster happen of the United States defaulting on its debt,” European Central Bank President Christine Lagarde told CBS News last month. “This is not possible. I cannot believe this would happen.”

Biden warned that the standoff is imperiling the United States’ position in the world. Given the centrality of U.S. financial markets, which would tank in the event of a public debt default, the situation has flummoxed analysts elsewhere, who don’t understand why the United States would hamstring itself with an artificial construct like this spending cap.

“The U.S. Treasury market is Washington’s golden goose, and the market shows the golden eggs it lays are still very much in demand,” Maximilian Hess, principal at London-based political risk firm Enmetena Advisory, which advises clients including credit insurers and other financiers, said to my colleagues. “And yet the U.S. has a rule in the debt ceiling that inexplicably says that the golden goose should be taken out back and shot unless it agrees to lay fewer eggs for a while.”

In 2011, House Republicans used their leverage to force President Barack Obama to concede to spending curbs that only recently expired. According to my colleagues, the impasse then caused a credit-rating agency to downgrade the country’s reliability to pay its debt and cost U.S. taxpayers some $1 billion.

As debt ceiling fight rages, Democrats bring up an old idea: Abolish it

Debt ceilings exist in various forms in a handful of other countries. But the vast majority of nations around the world do not impose hard caps on public spending, and certainly don’t go through rounds of legislative gridlock to navigate around debt obligations. Some countries maintain a public debt ceiling pegged to a percentage of national gross domestic product, though many have greater legal flexibility in transgressing these limits. Member states of the European Union are committed to keeping their public debt within 60 percent of GDP, but the rules are soft and there are E.U. mechanisms to provide relief to countries in duress.

“Debt limits are self-imposed tools to facilitate sound fiscal policy,” wrote Mrugank Bhusari of the Atlantic Council’s Geoeconomics Center. “But in practice they serve as orienting goals or tools of political bargaining at best, and triggers of economic chaos at worst. It is unsurprising that most of the world chooses to have no such limit.”

Denmark is the only industrialized democracy other than the United States to have a debt limit set at a nominal value. But it exists as a formality, set at a level far higher than current Danish debt and therefore never the subject of complicated political wrangling.

“The debt limit doesn’t make one iota difference in the Danish case,” Torben Iversen, a political economist at Harvard University, told me. The Danish parliamentary system also ensures that any coherent ruling majority can set the agenda around fiscal policy, whereas the divided nature of American government creates these points of friction and allows “counter-majoritarian” impulses to take hold.

“In the U.S. system, you can have a majority that wants to raise the ceiling,” Iversen said, referring to the electoral mandate secured by the Democrats in winning the presidency and a slim majority in the Senate, “but then you have a minority that can jeopardize your ability to run the government.”

The polarization in Washington and the hard-line approach of the Republicans, Iversen added, “creates perverse incentives to use instruments to undermine the majority and that can’t happen in Denmark or in any parliamentary system.” He said that the existence of the debt ceiling “does not make fiscal or macroeconomic sense” and has led to “unbelievably reckless” politicking by lawmakers in Washington.

Across the Atlantic, there have been many instances of political paralysis and gridlock, but never over something as potentially arbitrary as debt ceiling. “In terms of dysfunction of the political system, perhaps the closest parallels are the kind of protracted coalition negotiations you see in Belgium or the Netherlands or the regular functioning of the U.K. government,” Stan Veuger, an expert on European political economy and senior fellow at the American Enterprise Institute, told me.

“To the extent that the current crisis has received attention outside the financial press, it’s portrayed as illogical,” he added. “But the coverage is less panicked than here in the U.S., and framed more like the aforementioned coalition negotiations than one might perhaps expect. It’s generally not portrayed as some sort of illegitimate hostage-taking, at least for now.”

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