Happy 2023, right? New year, same old problems. I’ve written about the debt ceiling in 2011, 2013, and 2018. When the debt ceiling becomes a problem, it becomes a problem for us. As a Public Health Service officer, my wife is a half-military, half-government worker. She’s paid on a military pay scale, deploys, and has a military pension. However, she’s not forced to relocate and applies for jobs. It’s an interesting mix. When furloughs come, she’s forced to work because of the military component, but they don’t pay her because of the government worker component. There’s no plan because this isn’t supposed to happen.
I understand that there was no plan for COVID. However, this happens every three years on average (potentially the 4th time in 12 years), so there should be a plan. I just asked my wife, and no one is talking about it. I’ve read that it may not become a big problem until June, so maybe that’s why.
Let’s rewind and review the situation.
What is the Debt Ceiling?
Note: There are far better experts on this than me, but I’ll give you my understanding. This necessarily becomes political, but that shouldn’t impact the core facts.
Let’s start with a quick clip from The West Wing:
The best way I know how to explain it is with Schoolhouse Rock. The specific short is Tyrannosaurus Debt. Essentially the United States borrowed money to pay for wars, but now it pays out more money for other stuff (roads, libraries, Medicare, Social Security, etc.). It has promised to pay out more than it receives. Any personal finance guru will tell you that spending more than you make is a bad combination.
To make up for the difference, the United States sells bonds. However, it has to pay interest on those bonds, or it will default. Think of what happens if you don’t pay your credit card bill. That’s a disastrous situation because the world will lose trust in the United States government.
In 1917 the government passed a law that caps the amount of debt the United States could have. Once we hit that limit, we can’t pay out money. That’s a problem because all those government programs can’t be funded. That’s when you get a government shutdown. Seniors don’t get Social Security. My wife doesn’t get a paycheck. Many, many other terrible things happen.
It’s important to understand that this number is artificial. If Congress agreed, they could say that the new debt ceiling is 999 trillion dollars, and no one living today would likely ever have to fear a government shutdown. It’s also important to understand that the debt ceiling has nothing to do with the budget and spending. Congress has already agreed and passed the spending/budget – it’s only about the process of paying it.
So What’s the Problem This Time?
Here’s where it gets political.
Republicans say this spending is out of control and must be reeled in. Objectively, almost every reader here is against piling up debt. (No one ever says, “I’m okay with unlimited student debt or credit card debt.”) Ironically, most of the national debt came when Republicans were in office. There were wars and COVID that made this spending reasonable.
The Republican control the House of Representatives, but it has limited power without control of the Senate. They don’t have many tools in their toolbox. One thing they can do is say, “We won’t raise the debt ceiling unless Congress agrees to budget cuts.” It’s not exactly clear to me where Republicans want to cut. I’ve read a few that say “wasteful spending,” but “wasteful” is often subjective. Some say that Social Security and Medicaid should be cut. Not many say that the military should be cut even though the US spends many, many times more on the military than any other nation. (I’m saying this as a military family.)
The Democrats aren’t pleased with the Republicans’ extortion. In their view, the budget was already agreed upon and threatening to ruin the United States’ reputation and risk shutting down the government doesn’t best serve Americans.
This time is different than before. Several Republicans decided they wouldn’t vote for a Speaker of the House unless they got a promise to hold out for budget cuts in exchange for raising the debt ceiling. The Speaker, Kevin McCarthy, agreed because he needed their votes. It appears that the Republicans will unite on the need for budget cuts. The Democrats are united in that they won’t let several Republicans use this thing that everyone agrees is essential as a negotiation tool.
It feels like each side is locked into its position. If this game of political chicken continues and neither swerves, the Americans will pay an enormous economic price. It would likely reverberate throughout the world’s markets.
According to this Washington Post article (potential paywall), the Republicans have considered that shutting down the government will make them look bad. It’s hard to win the votes of senior citizens when you end their healthcare and Social Security. The Republicans seem to have been trying to devise a prioritization plan to pay for some things they consider necessities in case the shutdown does happen.
The problem is that so many things are considered necessities. Republicans see continuing to pay the interest on the debt as one of these significant necessities. It is like making the minimum payment on a credit card so you can still be seen as a reputable borrower. However, much of that debt interest would go to foreign investors, including many in China. Politically, how could Republicans say that they consider paying China more important than services that Americans depend on? It seems like Republicans won’t even put out a prioritization plan because there will always be upset people at the bottom of the list. I’m not sure if there’s even an agreement by Republicans on what that would look like.
It’s wise to have some prioritization plan because, as I wrote at the beginning, this has come up several times, and it is chaos every time. However, an ounce of prevention is worth a pound of cure. It should never get close to a situation where a prioritization plan is necessary.
Final Thoughts on Debt Ceiling
How will it end up? No one knows.
I’m firmly in the Democrat camp on almost every topic. I do agree it is important to balance the budget. That would mean that my goals are aligned with the Republicans here. However, the debt ceiling is too risky to play games with. The time to balance the budget is when the budget is created and approved, not when it comes time to make payments.
If you’ve maxed out your credit card and can’t afford something, reduce your spending at the store – not when it is time to write the check. That will only blow up your credit rating, and you’ll pay double the interest.
Let’s return to that personal finance adage, “spend less than you make.” That’s what so much of personal finances boils down to. In most cases, spending less and making more are equally important. There are instances where spending can’t be cut anymore and when there’s no clear path how to make more money.
I think it’s possible that the United States can do both. I think it’s hard to go through all the spending and make cuts, but I’m sure there’s stuff in there that can be cut. With that in mind, I will say that everywhere my wife has worked, had a budget that is like a public school teacher in a poor school district. In the nearly 25 years she’s been in the workforce, the story has been, “we need half the people to do double the work.” Also, just last week, the FAA shut down all flights in the United States because of a problem with the Notam computer system. Some parts of the system are 30 years old. Think about it, Yahoo! didn’t exist 30 years ago.
Even if we could limit spending, it would be difficult to eliminate the National Debt. According to the Stockholm International Peace Research Institute, we spend more on defense than any other nation (801 billion in 2021). It is one of our largest expenses. If we didn’t spend another dime on defense, it would take nearly 40 years to eliminate our about 32 trillion dollar debt. It would not be a good situation if we didn’t spend a dime on defense, but that illustrates how impossible it would be to eliminate the debt by cutting spending – especially when we need to spend more to keep planes flying.
Alternatively, the United States government could try to make more money. That means raising taxes, which is always unpopular. One idea that has been seen as more popular is having corporations pay more. A few years ago, Republicans cut the corporate tax rate with The Tax Cuts and Jobs Act (TCJA). The average citizen got a break too, but much of it went to corporations. It increased the deficit by $2 trillion (or will by the time it ends in 2025). I don’t feel it was necessary. Corporate profits had been doing very well over the decade before it was passed. Unemployment was also extremely low, and it continues to be extremely low today (despite the spike with the COVID shutdown).
I admit that, personally, the TCJA worked out well for me. As an investor, companies bought back shares of stock, and the markets went up. My retirement accounts grew, and it felt terrific. However, I need to recognize that I can’t have my cake and eat it too. I can’t say, “We should eliminate the National Debt, but I want tax cuts.” The math doesn’t work out.
If you are interested in this stuff, I found a great guide on the US Treasury’s website. If you aren’t interested in this stuff, you are some kind of saint for getting to the end of this article and reading these words.