Debt limit is stupid and dangerous

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Congress avoided a government shutdown yesterday. But the solution is temporary. And all of the uncertainty caused the stock market to plummet nearly 5% in September. As Republicans insist not to raise the debt ceiling; there is more trouble.

What would a government shutdown mean for ordinary Americans?

Since essential Social Security and Medicare services and payments are not a discretionary expense, the first round of shutdown would only affect discretionary programs.

And because American wages remain low, workers rely on discretionary programs. Being the first in low-wage jobs is a dubious honor for Americans. We lead the rich nations in the proportion of workers in low wage jobs. Almost a quarter of all workers in the US earn less than two-thirds of the median wage, compared to Canada’s 21%; the UK, Germany and Canada clustered around 19%; France and Italy below 10%. So in America, many workers are dependent on food stamps and other means tested programs. At the 2013 shutdown, states were forced to pay for grant programs such as Temporary Aid for Families in Need, “Cash Aid”) and food stamps. Grocery stamps may have been threatened during the 2018-2019 shutdown.

Good news, Social Security and Medicare payments will be sent out on shutdown, but new beneficiaries will have to wait. The performance check and card issuance would be discontinued. During the 1995-1996 shutdown, more than 10,000 Medicare applicants were temporarily turned away every day.

Debt limit has little economic significance

It may come as a surprise that the debt ceiling debate is purely political and has almost no economic content.

The debt limit is only interesting because in the real world of the real economy it is not the level of national debt that matters, but what the state spends money on and how the state generates income.

The debt ceiling has no economic value because the debt targets are not adjusted for inflation and are not i trillion. measure upn assets held by the federal government. The Fed government could sell to pay bills. Over the past 25 years, the nominal federal debt has increased rose $ 5 trillion to $ 22.7 trillion in debt service payments (required interest payments on debt) shrunk from 3.0% of GDP to 1.8%.

The US Treasury Department uses bank accounts with the Federal Reserve to pay for federal activities through the use of tax revenues and borrowing. But because the United States has a statutory debt limit, the Treasury Department will no longer be able to borrow after that limit and will only be able to pay the bills with ongoing tax revenue. When the economy slows down, the government spends even less, which makes the economy worse.

As Josh Bivens of the Economic Policy Institute writes, debt would be a problem when government borrowing competed with corporate borrowing and demand drove up interest payments. But interest rates are not rising and there is no stress for the federal government capability to pay, although the political willingness to pay is in a political dispute. If the Republicans make Nancy Pelosi look bad, they are risking market stability.

The biggest problem we face is economic weakness as the American Cares Act funds allocated last year have been used up and shut down – like the 35 days we’ve had in the Trump administration could be a recession trigger.

The shutdown could cause a recession

The United States has a government debt cap, but it was weaponized in political struggles in 2011 to cut spending (not raise taxes). The Congressional Research Service’s excellent introduction to debt limits notes that since Congress introduced the budgeting method we used in 1976, there have been 20 “funding shortfalls when funds have not been used for at least a day. Before 1980 the government never closed.

If a shutdown results in federal payments missing and millions of workers going unpaid, meeting the debt ceiling could create a vicious circle in which exceeding the limit leads to a recession, resulting in declining revenues and more debt as the government increases Unemployment benefit pays etc. and receives less tax revenue.

There are other ways to regulate debt payments

If Congress doesn’t pay for the programs it has approved – like using my credit card and refusing to pay the bill when it comes – the Biden government could ignore the debt limit borrowing barrier and meet the obligation pay the bills. The Biden administration could spend debt by minting a trillion dollar platinum coin and spending it at the Treasury Department.

Also, as Bivens writes, “The US should join the vast majority of rich countries in the world that have no debt ceiling. There is talk of the Democrats in Congress getting the limit right, or the Atonement Act raising the debt ceiling to a very high number – say $ 500 trillion – which would effectively get rid of the debt ceiling.

Stay tuned: there could be a drastic spending cut around October 18th.

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