Surprise—The Debt Limit Is Here! Now What?

Let's leverage the debt ceiling debate to figure out how to live within our means

Dreamstime

Commentary

I wrote just over a week ago that we expected to reach the debt limit in late summer or early fall. That was based on a Bloomberg Intelligence estimate from the fall of 2022 when then-House Speaker Nancy Pelosi (D-Calif.) was pushing for post-election lame-duck Congress to increase it before the Republicans took control. I wrote that I would “weigh in here from time to time with some thoughts of my own as to how Congress can avoid the rocky fiscal shoals” between default and a sovereign debt crisis from a loss of confidence in the U.S. dollar. (See that column for my concerns.)

But on Friday, Secretary of the Treasury Janet Yellen shocked the markets by writing congressional leaders to advise them that the debt ceiling would be reached by Jan. 19.

Wow.

Let’s assume that’s true—because some have opined that Yellen advanced the time of the debt ceiling threshold to distract from other serious issues weighing on the Biden administration, just as the doubters did in 2011. Influential podcaster Steve Bannon called it “Gun-to-Your-Head Hostage taking … ” for a newly installed GOP House.

Yellen will, presumably, cobble together ongoing revenue streams from taxes, fees, and tariffs to pay interest on the debt and other critical expenses. That would likely push off a default date—when the government actually becomes insolvent and misses payments—into the summer  sometime, when Washington traditionally empties out as members of Congress return to their districts and states. So the pressure will be on to resolve the debt ceiling issue as soon as possible.

But the debt ceiling—and, more important, the underlying issue of spending—simply must be addressed and as urgently as possible.

New House Speaker Kevin McCarthy (R-Calif.) has reportedly agreed to freeze fiscal 2024 discretionary spending at 2022 levels, which effectively amounts to a cut in real spending, given inflation. But that is just nibbling around the edges. It might be suitable given the exigencies of the debt ceiling, but real spending reform requires a radical rethinking of U.S. foreign policy, fiscal policy, and the conduct of general government.

Keep in mind that since the turn of the last century (i.e., 1901), large deficits, in pure dollar terms, were a relative rarity. But debt started to grow  in the 1940s, for the war, as illustrated below. It took us from the beginning of the republic to about 1981 to reach a trillion dollars in debt. But 40 years later, we have grown that debt by more than 30 times that amount. Our debt has, simultaneously, gone from about 30 percent of gross domestic product (GDP) to more than 120 percent of GDP, or nearly $94,000 for every man, woman, and child in the United States. In other words, a family of four has debt of nearly $400,000.

Like someone who has gorged themselves on junk food, our spending has made us grotesquely obese, in a fiscal sense, and limited our national fitness to carry on the activities of a world power and to provide for the well-being of our people.