Tuesday, January 24, 2023

The Debt and the Debt Ceiling Have Virtually Nothing to do with Each Other

by Neil H. Buchanan

One of the many, many problems with the current discussion surrounding the Republicans' renewed threats to take us all hostage via the debt ceiling is that it invites everyone to spout off about anything that comes to their minds about debt, deficits, and spending.  These things have virtually (and to be clear, I mean as close as possible to literally) nothing to do with each other.

As I discussed in a column last week, people conflate government shutdowns with a possible debt default, which is also deeply problematic.  What makes the "I'm just gonna say whatever comes into my head about government and money" response especially annoying, however, is that it opens up an unfiltered fire hose of statements based on confused thinking, uninformed priors, and an inability to separate the past from the present.  Please allow me to illustrate.

Last week, Professor Dorf generously responded to a request for an interview from a Canadian news program.  As is typical of such things, they talked with him at length and then used about thirteen and a half seconds of the interview on-air.  Happily, they did not edit him in a way that was misleading or unfair, opting instead to have him say something completely banal: "If [the debt ceiling] actually isn't raised, that's extremely concerning.  That would mean that the US government cannot pay for all of the spending that Congress has required it to pay for."  As one might imagine, that was merely the setup to say something important, but the editors decided not to include any of Mike's interesting and useful commentary.

Why not?  We can only infer their reasons based on what they did put on the screen, and it was truly depressing.  Essentially, they used the moment as an opportunity to say "wow" about how big the US debt is, presenting the story in a way that blithely assumes that it is too high and that having high federal debt is self-evidently awful.  Among many examples, the anchor led off the broadcast with this teaser: "On this Thursday night, the US has max'ed out on its debt."  She then began the segment with this:

"The United States government, which has an astonishing amount of debt, has hit the limit of what it can borrow.  It is quite the milestone.  The US owes a record 31.4 trillion dollars. That's the country's so-called debt ceiling.  To continue paying the country's bills, lawmakers must raise that ceiling even higher, so the country can borrow more money and avoid a default."

Sticking with the theme, the correspondent on the piece referred to the US debt as "staggering."  Naturally, there was no attempt to put the number in any context, to point out that that number is gross and not net, or anything else.  It is all just the most basic gut-level stuff that we have seen for years: Golly gosh, is that a trillion with a "t"?  That's a lot of money.  Notably, this was on a news program, so this was offered not as opinion or commentary but as informative journalism.

Even the most infrequent readers of Dorf on Law will recognize that this is hardly a new problem.  I remember railing about Jon Stewart's naivete back when he hosted "The Daily Show" (for example, in this column from nearly ten years ago), where he kept emphasizing the word trillion at every opportunity.  Both of my columns last week similarly bemoaned the current situation, where people's ignorance combines with their unexamined belief that somehow the wisest adage of all time is: Neither a borrower nor a lender be.  Yes, that Shakespeare guy was a real financial whizkid.  (That the quote from "Hamlet" has to do with how loans among friends can create tension is somehow lost on people.)

But perhaps it is unkind to speak so harshly of a talking head, in Canada or elsewhere, merely because she uttered words that an equally uninformed producer shoved into her teleprompter.  As we have seen time and again, even people who are supposed to know that they are talking about too often prove to be just as stuck in the conventional wisdom, which they clearly accept on faith.

After all, The New York Times continues to publish nonsense from one of their business writers, Jim Tankersley, who in a column two days ago committed all of the errors that the Canadian anchor committed, and more.  I honestly was too annoyed even to finish reading the column, because it was such a mess.  The headline -- "How the U.S. Government Amassed $31 Trillion in Debt" -- sets the tone (amassed ... ooh), but the larger problem is that the piece flips back and forth between talking about the debt ceiling and the debt.  And as I pointed out above, those two things have nothing to do with each other.

Why not?  It will be easier to explain by looking at Tankersley's opening paragraphs:

America’s debt is now six times what it was at the start of the 21st century. It is the largest it has been, compared with the size of the U.S. economy, since World War II, and it’s projected to grow an average of about $1.3 trillion a year for the next decade.

The United States hit its $31.4 trillion legal limit on borrowing this past week, putting Washington on the brink of another fiscal showdown. Republicans are refusing to raise that limit unless President Biden agrees to steep spending cuts, echoing a partisan standoff that has played out multiple times in the last two decades.

The piece then goes into a both-sides-are-to-blame story about "America's ballooning debt," as if the problem that we face today is the level of debt itself.  But there would be no looming Armageddon simply because gross federal debt (which, again, is not at all a meaningful number) is $31.4 trillion, or any other number.  If the debt ceiling did not exist, the Treasury would be doing this week what it does every week -- paying checks as the nation's bills come due, using incoming tax revenues plus borrowed funds to make up any difference.

When (I no longer think that this is an "if" scenario) we reach the drop-dead date where so-called extraordinary measures make it impossible to pay all of the nation's obligations, then there will be a default, unless President Biden listens to Professor Dorf and me.  And even if he does heed our advice, the Republicans will have created a constitutional crisis that will still be quite bad for the economy (but better than a default).

But if the debt limit did not exist (or was suspended or was at least high enough not to matter), there would not be a possible first-ever default, no global economic meltdown, and no irremediable damage to the "full faith and credit of the United States."  The debt is not the problem.  The debt ceiling is.

In other words, Tankersley's first paragraph has nothing to do with the second.  Paragraph 1: "Debt big."  Paragraph 2: "Fiscal showdown."  But again, the showdown is only happening because Republicans are using an unconstitutional historical error to threaten to nuke the economy.  The showdown would be happening even if the debt was projected to go down over the next decade, because the amount of spending right now exceeds how much revenue we are taking in.  That is happening because of the laws that have already been passed.

Moreover, that would all be true whether the debt hit a legislated ceiling of $31.4 million, $31.4 billion, $31.4 trillion, or $31.4 quadrillion, because the problem is that Congress has obligated the country to add more debt than the debt ceiling purports to allow.  The level of debt does not matter.  The artificial ceiling is the problem.

Much of Tankersley's article is a retread of a piece that he co-authored with Alan Rappeport for The Times this past Fall: "U.S. National Debt Tops $31 Trillion for First Time."  In response to that article, I wrote a two-part Verdict column as well as a Dorf on Law column, mercilessly mocking Tankersley and Rappeport for (as I put it in my Dorf on Law piece) writing "a jaw-dropper of a faith-based article inveighing against federal debt."

Among other things, I ridiculed the "for the first time" aspect of their story (echoed in the Canadian news anchor's comment that "[t]he US owes a record 31.4 trillion dollars").  In a growing economy, we should expect many of the numbers to go up over time: GDP, debt, employment, prices, and so on.  Other than day-to-day fluctuations or cyclical phenomena like recessions, all of those data series and more will hit a new "record" number "for the first time" every day, week, month, year, and decade.

Even when Tankersley, in this week's piece, manages to say something honest and non-panicky, he again conflates the debt with the debt ceiling:

Few economists believe the level of debt is an economic crisis at the moment, though some believe the federal government has become so large that it is taking the place of private businesses, hurting growth in the process. But economists in Washington and on Wall Street are warning that failing to raise the debt limit before the government begins shirking its bills — as early as June — could prove catastrophic.

Yes, it is true that no serious economist thinks that the debt is at crisis levels, although it is worth noting that he adds "at the moment" to hold onto the position that he and Rappeport took last Fall that rising debt could could cause investors to lose confidence, which could cause "interest rates to increase abruptly and inflation to spiral upward."  Their source was the Congressional Budget Office, which is very hawkish on fiscal policy, but even under their scenario, the apocalypse would only happen if (as I put it on Verdict) interest rates go up and "are going to stay up, and indeed they are going to stay up so high and for so long that the financial markets will freak out and create hyperinflation while the bond market melts down."  By the way, that was the only point in their column where they even attempted to argue -- as opposed to merely assuming -- that debt is bad.  And they could not even sustain that one attempt.

But to return once again to the larger point, that scenario has nothing to do with the debt ceiling.  Looking again at the two sentences in the block quote just above, we have the same two-step with the same misleading juxtaposition: (1) Debt hurts growth (maybe); (2) Not increasing the debt ceiling would be a catastrophe.

The second point is true.  It is absolutely true.  That is all that needs to be said.  If the business reporter whom The Times trusts (and pays) to write about fiscal issues is this willfully obtuse, should it be a surprise that the rest of the world is in a fog?

Finally, I should explain why I wrote "virtually" and not "literally" when saying that the debt and the debt ceiling have nothing to do with each other.  It is true that the debt ceiling is triggered when the level of debt exceeds the legislated maximum.  That means that the debt ceiling would be irrelevant if Congress had passed a budget that created a surplus or was in balance, because that would mean that there need not be additional borrowing.  So yes, the debt ceiling by its own terms is connected to the measured gross debt (as irrelevant as that number is).

Note, however, that Congress could amend the debt ceiling statute to require debt to go down over time -- "Gross federal debt must be no higher than $31 trillion at the end of 2023, $29 trillion at the 2024, ..." -- and if it then passed spending and taxing laws that did not allow Treasury to pay down the debt on that schedule, we would face the same artificially induced catastrophe.  The Treasury would then have to refuse to pay down debt as fast as Congress told it to, or the Treasury would have to stiff people to whom the government is obligated.  In other words, even falling debt is not enough to prevent Congress from putting the executive branch into an impossible bind.

None of this matters, of course.  We are about to endure months of people plumbing new depths of confusion, far worse than any of the examples that I have lampooned here.  Count on it.

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