- Congress is hurtling toward a mid-October deadline to raise the limit on how much debt the government can carry.
- If the US is a house, lawmakers are children playing with “a box of dynamite,” JPMorgan’s David Kelly said.
- If Congress fails to lift the limit, spending on key programs will freeze and the country will likely plunge into recession, the White House warned.
- See more stories on Insider’s business page.
If the US is a house, lawmakers are children, and the possibility of Congress defaulting on the national debt is a “box of dynamite,” David Kelly, chief global strategist at JPMorgan, said in a Monday note.
For the 58th time in 50 years, Congress is faced with the task of either raising or suspending the government’s debt ceiling to avoid a catastrophic recession. Democrats have just a few weeks to stop picking on each other or get their Republican friends to play nice and agree on a fix
Every generation of children, Kelly said, “seems just a little more reckless and irresponsible than the last.”
The debt ceiling is a simple concept. Borrowing is a regular part of government operations to keep the country running. The limit – created at the start of World War I – refers to the amount of money the Treasury Department can borrow before risking default.
The Treasury last suspended the ceiling on July 31, which froze the limit just above the present-day amount of debt. Treasury Secretary Janet Yellen has since kept debt just below that limit using several accounting tricks. Yellen warned lawmakers last week that this temporary solution would only last through mid-October, but Congress has yet to agree on a fix.
Republicans have balked at the prospect of raising the ceiling even more, with Senate Minority Leader Mitch McConnell recently saying Democrats will have to lift the limit on their own to pay for their $US3.5 ($AU5) trillion social spending plan.
Democrats, however, maintain Republicans are at least partially responsible for the ballooning debt pile. House Speaker Nancy Pelosi likened raising the ceiling to “paying the Trump credit card,” and President Joe Biden said Thursday that the GOP’s 2017 tax cut drove the deficit sharply higher.
What happens when the fuse is lit
Should Congress fail to lift the ceiling, the fallout could be drastic, as Yellen has warned.
Federal support for disaster relief, education, infrastructure, and public health would end. Lawmakers would be forced to take a sharp turn toward austerity, slashing spending on social programs and other sources of aid to cut down the budget deficit. And taxes would likely be raised to make sure the government can cover its expenses.
To take such action in a time of normal growth would dramatically slow economic activity. To do so in October would “potentially trigger a catastrophic default on US government debt,” Kelly said. Though the US has rebounded from the worst of the COVID downturn, it’s still far from fully recovered. More than 8 million Americans remain unemployed. Consumers’ confidence in the economy sits at decade lows. And the Delta wave is more powerful than ever, with daily case counts exceeding those seen during the coronavirus’s winter resurgence.
The Biden administration is keenly aware of the risks and warned state and local governments of the consequences in a recent memo. The document, obtained by Insider, details how the country could fully reverse its recovery from COVID-19 if the limit isn’t lifted.
“Hitting the debt ceiling could cause a recession. Economic growth would falter, unemployment would rise, and the labor market could lose millions of jobs,” the White House said.
Democrats have just weeks to either sway Republicans or rally their disparate ranks around a last-minute plan. And whether the limit is raised before or after the October deadline, lawmakers have to once again face the prospect of hitting the ceiling again.
According to Kelly, there’s an “obvious solution”: eliminate the debt ceiling entirely. This would help avoid last-minute haggling on the issue, which happens every time the debt pile nears the government-set ceiling. There’s “no evidence” that having a borrowing limit has ever slowed the growth of government debt, says Kelly.
Plus, raising the ceiling only provides a temporary fix for a decades-old problem.
The government has long run a budget deficit, meaning it spends more than it raises in taxes. Eliminating the ceiling can let Congress spend more time crafting a sustainable budget, Kelly said. Lawmakers should focus on “the more relevant questions” of how much the US should tax, who it should tax the most, and how that cash should be spent, he added.