Debt Panic, Bipartisan Inanity, and the Downgrade of the US's Creditworthiness
Although it makes sense for everyone to be focused on the raw political madness that continues to spew from Donald Trump and his supporters, there are other crazy things happening that barely raise an eyebrow. Given that the major focus of my economic and legal scholarship over my career has been on federal deficits and debt, I was disheartened but not surprised to see that the two-month relative lull in inanity about federal borrowing ended last week.
The news that shook the financial markets -- indeed, that spooked Wall Street so severely that the recent rally in stock prices was temporarily stopped in its tracks -- was that the Fitch ratings agency had downgraded the US government's creditworthiness by one notch from its customary top-level rating. This is only the second time that federal debt has been downgraded by a ratings agency, the first time famously being when the Republicans' original abuse of the debt ceiling in 2011 was bungled so badly by the Obama Administration.
This time, however, the Biden Administration successfully avoided a Republican-induced catastrophe in an almost Houdini-like fashion, albeit in a way that does leave us vulnerable to future Republican hostage-taking. And to be fair, if we assess Fitch's arguments from one perspective, that "albeit" means that they are right to be concerned about the future. For example, a news article in The Washington Post notes that "Fitch pointed to 'repeated debt limit standoffs and last-minute resolutions,'" explaining correctly that "[t]he debt ceiling sets the maximum legal amount the Treasury Department can borrow, and failure to raise it in time — which takes an act of Congress — could mean bondholders of U.S. debt aren’t repaid in full."
To be clear, it is the debt ceiling, not the debt itself, that makes it possible that the government might be forced to default -- not only on payments to bondholders, but to anyone else with a legal claim on a government payment (such as veterans or retirees).
Interestingly, The Post notes that "the Jan. 6 insurrection incited by Trump
played a role in the downgrade, as it underscores domestic divisions
that could jeopardize lawmakers’ response to fiscal crises," according to a top Fitch official. But this is all rather odd, because Fitch knew that any economic damage (including higher federal borrowing costs) from their announcement would be blamed on the Biden Administration, which indeed it was. This is another instance in which the Republicans can create mayhem and then say, as they did repeatedly during the Obama years, that "the economy is terrible (in one way or another) because of this President."
Even so, if the Fitch decision had been entirely based on the likelihood of future debt ceiling crises, one could forgive them for taking a clear-eyed stand. After all, it is hardly their fault that the truth -- that Republicans' nihilism is harming the country's economic prospects (as well as everything else) -- does not win the political argument.
Unfortunately, Fitch also based its downgrade on something utterly preposterous, which is that the path of US debt justifies a reduction in the US's creditworthiness. To be precise, they argued that -- even setting the political nonsense aside -- federal debt is growing so fast that there will surely be a debt crisis in the US, which means that Fitch had to warn investors that lending to the US is risky. Again, this is supposedly not merely because of the Republican kamikaze squad but because the federal government is said to be borrowing too much.
Even more weirdly, Fitch justified its move in part by, as The Post article put it, "argu[ing] that it is unlikely Congress will act to rein in debt before the 2024 presidential election." That is simply unhinged, because even the most defensible view of the debt crisis scenario has nothing to do with what happens over the next fifteen months. Policy decisions will be on hold until after the next election? Stop the presses!
So this is all motivated nonsense. Indeed, as soon as I saw the news of the downgrade, I thought: "Oh brother, they decided to make an ideological statement. Just what we need from a supposedly neutral ratings agency." This was straight-up debt panic and fearmongering.
And even though it is nonsense, it is bipartisan nonsense. Anyone who thinks politicians should stop being disagreeable and find common ground ought to look at the consensus among Republicans and many (but thankfully not all) Democrats that debt is horrible, horrible, horrible. "Both sides agree" sounds good, until one discovers that the two sides are in agreement on something completely wrong.
How wrong are they? In his subscribers-only (that is, paywalled) newsletter late last week, Paul Krugman offered a masterful takedown of the idea that the US could have a non-hostage-taking-related default. Under the title, "Afraid of a debt crisis? Try doing the math," Krugman made me smile by noting the utter vapidity of people who know nothing about public finance but become apoplectic about big numbers. His sage advice: "Never take anyone who rants about TRILLIONS OF DOLLARS seriously."
More to the present moment, Krugman makes the points that sane macroeconomists have made for decades. Most notably, the US is one of the countries that issues debt in its own currency, which means that the country literally (and I am always very careful to use literally only to refer to "the primary or strict meaning of the word or words; not figurative or metaphorical") will never be unable to pay its debts. It can always pay them in full and on time, as a matter of financial and economic reality.
Beyond that, the reporter who wrote the article in The Post might not be quite as in the tank for the debt-panic-industrial-complex as, say, The New York Times's non-dynamic duo (passive pair?) of Jim Tankersley and Alan Rappeport, who are simply shameless in pushing debt fearmongering with an almost religious fervor; but he still dutifully reports the panicky bits without blinking.
For example, the reporter writes that debt is "projected to approach levels unseen since the end of World War II.
Fitch’s warnings, echoed by numerous nonpartisan forecasters, found that the national debt has soared and shows no sign of slowing." He also referred to "[t]he rising debt tide" and gave plenty of oxygen to the deficit scolds, while wrongly conflating the debt with the debt ceiling. Still, given the depressingly low standards of journalism when it comes to discussing federal finances, I would give him a B+ for the piece.
For his part, Krugman noted that "quite a few economists, including some who had warned strongly against big spending, pronounced [Fitch's] decision 'inept,' 'bizarre,' 'absurd' and worse." More to the point, he re-made the arguments that neither theory nor evidence supports the claim that the US's long-term debt is unsustainable. In particular, he revisits Japan, which has a debt-to-GDP ratio (the only number that one should care about when looking at these issues) roughly double that of the US yet "has defied predictions of an imminent debt crisis for decades." The UK has an even longer history of "high" public debt, going back centuries without ever having had a debt crisis.
After going on to debunk deficit scolds' claim that recent interest rate increases will be our undoing, Krugman concludes:
Is the United States likely to face a debt crisis anytime soon, or even in the next decade or two? Almost surely not. And if you’re worried about the longer run, I’d suggest that you pay less attention to the possibility of runaway debt and more to what increasingly looks like runaway climate change.
Even so, we continue to see things like this July 31 Politico piece (published prior to the Fitch mess) that treats deficit scolds as oracles, quoting one such publicity-seeking scold (who has no apparent education or expertise about these issues, by the way) saying this:
I agree that we should think about how to reform the debt ceiling, but I would have grave concerns about eliminating it completely. We would be fiscally unwise to remove the only action forcing movement without replacing it with something that would work at least as well for improving the fiscal situation.
Not that "action forcing movement" is even a coherent phrase, but apparently the idea is that the debt ceiling is useful because it makes it necessary for politicians to think about the deficit and do something about it. This would be more believable if the debt ceiling had ever been used in that way (rather than making things worse). In fact, the 2011 incident did result in some temporary reductions in spending (remember "the sequester"?), but that is when a different ratings agency first downgraded US debt.
More to the point, we have "action forcing movements" at least once a year, when Congress must pass budget legislation to (at the very least) avoid government shutdowns. As Professor Dorf and I have repeated endlessly, that is what limits the debt. If Congress wants to reduce borrowing -- which, again, is not per se good, and in fact is often a terrible idea -- it can collect more in taxes or reduce spending in upcoming months and years. The purveyors of deficit mania do not see Congress doing what they wish it would do, so they want to keep (but maybe "reform") the debt ceiling, because somehow that will someday get them what they want? I guess.
One notable part of that Politico piece, by the way, is a discussion of Professor Laurence Tribe's position against the constitutionality of the debt ceiling statue. Professor Tribe has endorsed the Buchanan-Dorf view that the debt ceiling is unconstitutional on separation-of-powers grounds, but whereas Professor Dorf and I are also somewhat sympathetic to an argument based on the Fourteenth Amendment, Tribe has explicitly rejected that constitutional analysis. Even so, Politico offers this: "Tribe was among the most vocal advocates for circumventing the debt crisis by invoking the 14th Amendment, which states that the 'validity of the public debt' cannot be questioned." That embedded link leads to a May piece written by one of the co-authors of the July 31 piece, which similarly mischaracterized Tribe's position.
On the substance, however, the more recent Politico article delivers the sobering news that the Biden Administration is backing away from its promise to "kill off the debt ceiling for good." The White House has decided to send it to a working group, which is never promising news. Moreover, this maneuver has a pretty strong whiff of the Biden team's response to calls to undo Mitch McConnell's packing of the Supreme Court: Gather an overly large number of people with impressive credentials into a working group, run some clock, and then decide to wimp out.
Does the US have a debt problem? No. Does it have a failure-to-understand-the-debt problem along with a can't-get-rid-of-the-debt-ceiling problem? Yes and yes. Even worse, it is all very bipartisan. Luckily, the crises of democracy and climate change will probably destroy us before the shared delusions about the debt and the debt ceiling ruin the economy.