January 31, 2023

Treasury’s ‘Extraordinary Measures’ Can’t Solve The Debt Limit Crisis

The looming federal debt crisis gets more worrisome this week, as the Treasury Department will start taking “extraordinary measures” to pay our bills. Although those measures can buy several months of temporary relief, President Biden ultimately may have to take unilateral action to avoid a fiscal and economic meltdown.

Without those measures, on Thursday the U.S. couldn’t pay all its bills, according to Treasury Secretary Janet Yellen. That would threaten America’s credit rating and put financial markets into a worldwide panic.

Remember we’re at this point because, unlike virtually every other country, we require a separate congressional vote to increase our borrowing. That borrowing doesn’t go for new spending, but just to cover spending Congress already has authorized in law. And hardcore conservative Republicans are threatening a debt limit and economic crisis to get spending cuts they couldn’t win through the normal legislative process.

Yellen will avoid a crash this week by using “extraordinary measures” to manage the government’s cash flow and available funds. The term is dramatic, but these are really just accounting steps to reduce burdens on the Treasury. They include investment sales (to raise cash), not reinvesting several government retirement funds (again holding the cash and not generating new debt), and not reinvesting cash in a fund for foreign currency stabilization.

All of this will create some budget room. But these accounting steps will only get us to sometime in June. If Congress hasn’t acted to raise the debt limit by then, a major economic crisis will result.

Starting in 1985, Treasury has resorted to such measures to buy budget time, most recently in 2011, 2012, and 2021. In all of those situations, a deal eventually was struck to raise the debt limit before a deep crisis resulted, although there were costs.

In 2011, budget turmoil and debt ceiling battles led to Standard & Poor’s first ever downgrade of U.S. debt. That shook the stock market, raised interest rates, and ultimately cost us billions of dollars in higher interest payments to bondholders.

My New School colleague Steve Pressman’s excellent piece on the debt ceiling notes that Treasury’s measures “will buy only a small amount of time,” so policymakers shouldn’t become complacent. Treasury’s actions this week are not a reassurance, but an urgent call for Congress to act.

That’s how we’ve avoided a debt ceiling catastrophe in the past. But the politics now may be even harder than previous standoffs. As I’ve noted earlier, House Speaker Kevin McCarthy (R-CA) got his seat because of deals made with hardcore combative Republicans, one of who said being “willing to shut down the government rather than raise the debt ceiling” was “non-negotiable.”

The longer Congress puts off action, the harder it will be. I’ve spent time on Capitol Hill, as economic advisor to Senator Edward Kennedy (D-MA), and as executive director of the Congressional Joint Economic Committee. I’m not optimistic about Congress’ role in this crisis. It’s much easier to stop things in Congress than it is to get them done.

Congress is slow to act even in less conflicted times, partly because of our Constitutional design that feared rapid government action and consolidation of power. We have two separate legislative chambers than can be controlled by different parties, and a chief executive not necessarily linked to legislative majorities. Our government is designed to move slowly.

But we also live in a highly partisan and divided period, going back to the “Gingrich Revolution” when then-House Speaker Newt Gingrich (R-GA) discovered a route to power through confrontation rather than cooperation. Both parties have become more ideologically consistent over time, but research from the nonpartisan Pew Research Center finds “Republicans have moved further to the right than Democrats have to the left.”

This polarization makes any congressional action much harder. While there are technical steps Congress could use to resolve the debt limit (discharge petitions in the House against Speaker McCarthy’s will; budget reconciliation in the Senate to pass a clean debt limit and confront the House), political pressures make those very hard to accomplish.

Some Republicans in turn say Congress can prioritize which bills to pay without creating much harm, so we shouldn’t worry so much. That’s widely rejected by most financial experts and economists. Neil Bradley, Executive Vice President of the U.S. Chamber of Commerce and a Republican ally, has said “prioritization doesn’t work.” And the Treasury Department says its payment systems aren’t set up to prioritize payments and they don’t have legal authority to do so.

If Congress fails to act in time, President Joe Biden will confront the first default in U.S. history, with significant threats to the financial system, the economy, and millions of Americans. Biden will negotiate and work with Congress as hard as he can, although he won’t be held hostage on cutting Social Security or other vital programs.

But the potential for congressional deadlock and a resulting economic disaster is why I and many others say Biden will have to consider dramatic steps like minting and depositing a trillion-dollar coin, or using the Constitution’s 14th Amendment to override the debt limit.

Those would be truly “extraordinary measures,” unprecedented in our history. Let’s hope it doesn’t come to that.

MORE FROM FORBESThe Looming Debt Ceiling Crisis

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