The (Fake) Debt Ceiling Crisis
The GOP’s Dangerous Gamble
Summary: The debt ceiling crisis is a completely manufactured, self-inflicted wound that only the GOP sees fit to weaponize when it suits them. Forget the fact that it has been raised 78 times since 1960, 49 of which were under a Republican president—the House Republicans are determined to derail Biden’s economic gains any way they can. Today’s Topical Cream breaks down the fallacy of the debate and puts our budget in context with our debt.
Listen to the full episode here.
Congratulations, America, we have yet another self-inflicted debt ceiling crisis on our hands.
The last time we were in this mess was 2011 when a Democratic president was dealing with the fallout of a Republican administration that went hog wild on spending after cutting taxes. Everything old is new again in the good old U S of A.
The last time we faced a grudge match over raising the debt ceiling, the Tea Party band of the Republican Party had just taken over the U.S. Congress. This wing tried to tie the annual raising of the national debt to social spending, despite these two things having nothing to do with one another. In effect, the argument then—as it is today—essentially went like this: We won’t allow the Treasury Department to borrow more money to pay for our pre-existing debt until you slash spending down the line—potentially risking, you know, your grandmother’s healthcare and making it harder for poor people to live.
It’s funny how defense spending never enters the picture at a time like this. Anyhoo.
Fun fact. Congress has acted on the debt ceiling 78 separate times since 1960, according to the Treasury Department—29 times under a Democratic president and 49 times under a Republican. So that MSNBC talking point you’ve probably heard ad nauseam is actually true. During the Tea Party reign of terror in Congress, three prominent figures who called themselves the “Young Guns,”—yes, they actually referred to themselves like that—were Paul Ryan, Eric Cantor and Kevin McCarthy. That Kevin McCarthy. These were Ayn Rand acolytes who believed in a balanced budget and that all entitlements should be privatized. They were instrumental in forcing then Speaker John Boehner to play a ruthless game of chicken with President Obama over the debt ceiling.
The last of the “Young Guns” tries to stick up the government.
So, McCarthy is the lone survivor in Congress of the Young Guns and going back to the 2011 playbook pledging to cut social security, medicare and the IRS as part of a broader strategy to reduce spending. Of course, McCarthy and his allies have not publicly released their plan to avoid a default, nor have they acknowledged that Trump had “the third-biggest primary deficit growth” in history, according to ProPublica, behind only George W. Bush, who started two wars, and Abraham Lincoln, who was paying for the Civil War.
Biden, as it stands, has dismissed the premise that such negotiations be contingent on government spending. So that’s good.
But as this fight drags on, there are a few things worth dissecting. First, let’s be clear, the looming debt crisis is not the same as a government shutdown—in fact, it’s worse. While a shutdown is seemingly more chaotic because we can actually see its impacts firsthand—the furloughing of workers and the shutdown of parks and other services, for example—a default could do terrible damage to the economy and make life miserable for people who rely on social programs like Medicare and social security.
Another thing: We have to demystify the whole concept of public debt. There’s this notion that because China holds so much of our debt, it can theoretically tank the U.S. economy at any time. We’ll get into that a little later, but just know that the Chinese economy and the manufacturing hub that it created owe a lot of its success to our debt, so it’s essentially been a win-win for both sides. And finally, what the hell is the point of this to begin with? The broader fight is largely built on the fallacy of balanced budgets—a duty the federal government isn’t obligated to perform. And even that premise is flawed, considering that historical data shows that the economy has experienced more expansion in the decades following the so-called “balanced budget” period.
So, what gives?
Let’s start with some basics. The federal government consistently runs a deficit—meaning its expenses outpaces revenue. In fact, the U.S. hasn’t had an annual surplus since 2001—and we all know what happened in the ensuing years. A recession. Since that time, the federal debt has grown to $31 trillion. But the key metric to look at is debt-to-GDP ratio. And, at the end of 2019, the total debt to GDP was around 107%. Meaning we had more debt than economic activity. Today, that figure is around 129% due to the pandemic era spending and Trump era tax cuts. In 2019, it was the highest ratio since World War II. It had already been steadily increasing due to the Bush era tax cuts and spending on the Iraq and Afghanistan wars and the Great Recession bailouts. Just for some context, by the way, Japan’s debt to GDP ratio is 1,300%, and they own the largest amount of U.S. public debt. Not China.
So let’s talk about types of debt and who actually owns it.
Here’s what happens. The Treasury Department sells securities to investors and other countries—the most notable being China because of the disproportionate media attention associated with its U.S. debt holdings there. But, according to the Congressional Budget Office, by the end of 2019, 10 countries with the largest holdings, in order, were: Japan, China, the United Kingdom, Brazil, Ireland, Luxembourg, Switzerland, the Cayman Islands, Hong Kong and Belgium. Obviously, China isn’t the only nation that wants a piece of the pie. Why? Because the United States is still the best investment in the world.
The China Narrative
Over the years, there’s been a great deal of fear-mongering around China’s U.S. debt holdings, much of it fueled by speculation that China could eventually dump it all and presumably send the U.S. financial system into a spiral. That’s just not how it works. It’s actually the reverse, because such a scenario would actually be pretty bad for China’s economy. But first, some perspective. Sure, China holds a lot of our debt, but it only amounts to about 3% of our outstanding treasuries. The far majority of our debt—about two-thirds—is actually held by the American people.
China’s economy has thrived since it began acquiring U.S. debt to support its export economy, which it started to build up at the beginning of this century. In 2000, China owned $60 billion of U.S. Treasuries—now it’s under $1 trillion; while Japan remains the largest debt holder at just over $1 trillion. And, since 2009, China has been the largest exporter in the world. That begs the question, would China leverage its Treasury holdings to severely damage the U.S. economy? Of course not. It’s an easy source of positive return on investment.
The China narrative is a red herring. The bigger concern for U.S. taxpayers shouldn’t be its global rivals, but the wealthy from the inside looking to capitalize on the crisis. If the country defaults on its debt, millions of Americans may lose access to certain federal benefits, such as Social Security, Medicare and Medicaid. Again, the government has never intentionally defaulted, so much of the potential fallout to the economy and people’s lives is uncertain.
The government, of course, will essentially go line-by-line and have to prioritize payments, and bondholders are betting that they’ll be among the first to secure payments.
Here’s what could happen in this scenario, which is par for the course for America’s heavily financialized economy, according to corporatists interviewed by Politico:
“A number of prominent financial experts at Bank of America, Barclays and other major firms are confident that the U.S. will avert a global market meltdown by continuing to pay its bondholders if the Treasury Department crosses the threshold where it can’t cover all its other bills. They think the U.S. can do so by withholding funds for things like benefits owed to individual Americans or payments to firms doing business with the government.”
It’s a truly evil scenario, and one that was tested during the Obama administration by the so-called Young Guns. Even back then they were planning on taking care of Wall Street. Politico recently reported that an official “told the Treasury in a 2014 letter that documents prepared by the New York Fed ‘exhaustively detail how the department and the bank would implement any plan to prioritize payments on Treasury bonds.’”
It goes on to say that Obama’s former Treasury Secretary, Jack Lew, confirmed “that officials ran an exercise to see whether the government could physically pay bond payments and nothing else.”
In other words, the powerful and well-connected have been pitching this to the Treasury and actually gave this save-the-rich scheme a test drive, knowing full well that ordinary Americans would be left in the lurch.
Groups that advocate on behalf of social security say the debt limit fight and the GOP’s obsession with reducing social security spending could be a “train wreck” for Americans who rely on benefits. Essentially, delayed payments could limit how people pay for healthcare, food, rent, utilities and other necessities.
The fact that the GOP is trying to disrupt life for millions of Americans is even more grotesque when you consider that two-thirds of people depend on social security for half their income, while 40% rely on those benefits for, get this, 90% of their income.
It’s even more bizarre when you take into account America’s aging population, the rise in obesity rates, and other diseases that come with older age such as Alzheimer’s that will continue to tick up. People are going to need these benefits more than ever—but we’re prepared to pay out bondholders first once the you-know-what hits the fan.
And, as always, the GOP has used this as fuel for its crusade to pass a Balanced Budget Amendment, which besides being a pipe dream, is terrible policy. Most economic experts agree it would do more harm than good. And, such an amendment would be devastating during future economic crises. On our podcast, we did a full episode on the concept of Modern Monetary Theory, which essentially holds that the top currency sovereign nations in the world not only can run deficits to keep the global economy running, it’s essential. You don’t have to be a proponent of this specific theory to understand this or believe in it, mind you. The CBO estimates that interest on our federal debt is about 1.6% of our GDP, or only 7% of the federal budget. These payments help keep the global economy flush and are well within our ability to manage them. But, if the GOP was so determined to cut spending, there’s only one obvious place to do it. The military budget consists of nearly 30% of all U.S. spending and more than half of discretionary spending, when you add up pentagon spending, maintenance of more than 800 military bases worldwide, payroll, military contractors, veteran spending, homeland security, surveillance operations and more. Social Security, for comparison sake, is actually fully funded directly by U.S. citizens who pay into it, and the surplus—yes, there is a surplus—is invested into the general funds collected by the government. So, the only real unfunded part of the budget is actually the military, which is a third of the total budget, despite the fact that we’re not at war. But, you’re not going to hear Kevin McCarthy talk about that little nugget of massively important information.
What this so-called crisis has revealed, yet again, is how federal lawmakers, who are backed by the wealthiest corporations in the world, are willing and eager to screw the American people for literally no good reason. The whole argument is based on a lie that the federal government needs to balance its budget just like anyone else—states, local government, and the American people themselves. What they don’t tell you, though, is that everyone else can take out credit to avoid a short-term crisis—something they don't think Uncle Sam should be entitled to. So, that’s the nonsense surrounding the debt ceiling crisis. It is all political theater designed to drive toward this concept where we have to balance the budget, which has proven to be wrongheaded and devastating.
Here endeth the lesson.
The White House: The Debt Ceiling: An Explainer
Congressional Budget Office: Federal Debt: A Primer
Center on Budget and Policy Priorities: Policy Basics: Deficits, Debt, and Interest
U.S. Department of the Treasury: Debt Limit
ProPublica: Donald Trump Built a National Debt So Big (Even Before the Pandemic) That It’ll Weigh Down the Economy for Years
Investopedia: Why China Buys U.S. Debt With Treasury Bonds
Center on Budget and Policy Priorities: House Republicans’ Pledge to Cut Appropriated Programs to 2022 Level Would Have Severe Effects, Particularly for Non-Defense Programs
CNBC: As U.S. hits debt ceiling, here’s what it could mean for Social Security and Medicare
National Committee to Preserve Social Security and Medicare: Raising The Debt Limit: Impact on Social Security and Medicare
Politico: ‘Intellectually bankrupt’: Biden allies blast GOP debt-limit backup plan
Center on Budget and Policy Priorities: 5 Reasons Why the House Balanced Budget Amendment Is a Bad Idea
Population Reference Bureau: Aging Baby Boomers to Face Caregiving, Obesity, Inequality Challenges