Opinion | Threats to cock the debt ceiling are more dangerous than ever

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Peter R. Orszag, managing director of financial advisory at Lazard, is a former director of the Office of Management and Budget and the Congressional Budget Office.

Could 2023 be the year the debt ceiling time bomb finally explodes?

In October, House Minority Leader Kevin McCarthy (R-Calif.) warned that Republicans plan to use the debt limit as leverage to demand spending cuts, potentially including Social Security and health care cuts, that President Biden will not accept. Now that Republicans have won control of the House and McCarthy is potentially the next speaker, the threat is real. And this time, thanks to shifting political forces and lower liquidity levels in the Treasury market, the danger is greater than it has ever been.

That makes the upcoming lame session of Congress the most important since at least 1974. It would be wise to find a way to raise the debt ceiling before control of the House changes.

The debt ceiling – now $31.4 trillion, a level that will be exceeded by the third quarter of 2023 – is an anachronism. Congress enacts changes to tax laws and entitlement programs (such as Social Security and Medicare) and sets out-of-entitlement spending each year. These decisions, in turn, exhaust the political levers available to control the level of US public debt. (Debt evolution is also influenced by the economy, market interest rates and other factors, but these are mostly beyond the control of politicians).

As the Government Accountability Office has written, “The debt ceiling does not control the amount of debt. Instead, it is an ex post measure that limits the Treasury’s ability to borrow to finance decisions already enacted by Congress and the President.”

If the debt limit were simply a trivial accounting constraint regularly adjusted by Congress and the White House to reflect policies already enacted, it could be harmless. But politicians have learned to wield it like a weapon.

It is especially dangerous in today’s highly polarized environment, because the political norms that governed past negotiations – in particular, the idea that avoiding default is paramount – may no longer hold. In a world with unclear exit ramps on crucial issues including the war in Ukraine and rising tension with China, there is no need for a new Gordian knot around the debt limit.

Nor is this a good time to raise further questions about our country’s willingness to break our own laws and regulations, an issue often raised by executives and business leaders around the world.

Another new concern centers on signs of less liquidity in the Treasury market. In July 2021, the Group of Thirty, an independent organization of economic thinkers, reported that “the aggregate amount of capital allocated to market-making by bank-affiliated players has not kept pace with the very rapid growth of debt in the Outstanding tradable treasury”. Other analysts point to reduced Treasury purchases by foreigners as a contributing influence; the Federal Reserve’s shift from expansion to contraction of its balance sheet is likely another exacerbating factor.

Whatever the cause, low liquidity levels in the Treasury market are leading to increased volatility. Treasury Secretary Janet L. Yellen is considering efforts to de-escalate tensions, including a potential Treasury buyback program and increased transparency. It is unclear what measures will work, but what the Treasury market will definitely do Not need is heightened uncertainty about the debt ceiling. Nervousness about less liquidity in Treasuries makes threats to the debt limit more dangerous than in the past.

There are two ways to reduce the risk of the situation in the lame session of Congress. One is smooth ordering, which would require the cooperation of Senate Minority Leader Mitch McConnell (R-Ky.) and a number of sitting Republican senators wise enough to join Democrats in addressing the issue now. But that might not even happen.

The other option involves a new budget resolution, which would facilitate the use of the reconciliation process to raise the debt limit, as was done in 1990, 1993 and 1997. This approach would require two votes: the first on the budget resolution and the second on reconciliation. It would take about two weeks of sitting in the Senate, but could be accomplished with just 50 votes.

Any Democrat opposed to taking such a painful vote now should consider how much influence their party will lose once Republicans control the House and how much higher the risk of default will be. It is generally not a good idea to enter into a negotiation with a time bomb and a counterparty willing to detonate it.

The next two years will be turbulent, however. The president and Congress can make them less risky by addressing the debt limit in December.

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