The world faces unprecedented crises today.
When Russia invaded Ukraine, the world moved as close to nuclear war as the height of the Cold War. Inflation in the United States has increased to over 300% it’s normal level. Other advanced countries around the work, such as the United Kingdom, have seen even greater inflation. Supply chains are still disrupted around the world. Once rare experiences, like shortages of baby formula, have become common day in our society. Extreme weather has exacerbated these clogs on our supply chains. Covid remains a deadly force to both populations and firms in countries such as China. All of these factors have made our day-to-day lives more difficult as we can no longer maintain the same standard of live that we have become accustomed.
With all of these challenges in the world, the U.S. needs to come together to conquer these challenges and maintain our economic advancement into the next phase of history.
Given all of these issues, I have a profound disappointment in seeing a completely manufactured crisis on the horizon: the debt ceiling.
Even economists can be confused the debt ceiling. To understand the debt ceiling crisis, imagine that every time you pay your credit card balance at the end of the month, your bank must sign off on you transferring the funds. When the bank says “yes, you can pay what you owe to the credit card company,” nothing will really change from your life now. You will be able to pay your debts and keep your credit score high. Now suppose that the bank says that you aren’t allowed to pay the credit card balance this month despite having enough money. You cannot pay your bill. You’ll be forced to pay a penalty fee and face a higher interest rate in the future. When you want to secure a loan to buy a boat or a house, you’ll be forced into paying a higher rate on the loan than your peers. Why would the bank doom you to this fate? The bank wants you to spend less money in the future. I cannot imagine a person that would not be annoyed and irate if faced with this scenario.
In this metaphor, the House of Representatives is the bank, or the institution that allows the U.S. to pay their owed balance.
The Democratic Party wants to just allow the government to pay their debts by raising the debt ceiling. Those in the Republican Party are refusing to allow the debts to be paid back unless it also comes with a promise of future spending cuts.
Federal budgets are set by Congress; however, it is a separate issue than the debt ceiling. Budgets determine how much will be spent in the following year. Increasing the debt ceiling allows the government to pay for things that have already been approved by Congress and bought in the previous year.
Last Thursday, the government hit the debt ceiling. Without raising it soon, the U.S. will default on their debt.
A default would cause higher interest rates and borrowing costs. Many in the economy, such as federal workers and those on social security, could lose their income. This loss of income spirals throughout the economy as firms lose their customers. For our nation, which is right on the edge of recessions currently, a federal default would force the country into a massive recession that would proliferate to through the global economy. Millions will lose employment in the US alone.
This is not the first debt ceiling crisis that our country has faced. In 2011, members of the Tea Party movement pushed the newly empowered Republican Party to refuse to raise the debt ceiling to leverage future spending cuts. The US narrowly avoided catastrophe; however, the willingness to destroy the economy by the legislative branch caused a downgrading of the US’s credit rating. Ironically, the Republican Party’s desire to see spending cuts resulted in an increase in government borrowing costs by $18.9 billion. In 2013, the Republican Party again refused to raise the debt ceiling unless the Affordable Care Act were defunded. Less destructive debates around the debt ceiling have been more commonplace.
In each of these crises, those refusing to raise the debt ceiling as a way of extorting some future benefits are acting reckless and wrong. With this debt ceiling crisis, those refusing to raise the ceiling are inconceivably immorally. The American people have been through so much in the last few years. They deserve much better than this treatment.
We must ask ourselves why we allow this treatment by our elected officials. At the very least, the system needs to be reformed to stop these bad actors.
A good start would be eliminating the archaic and useless debt ceiling.
Zachary Cohle is an Assistant Professor of Economics at Saginaw Valley State University.
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