Editor’s Note: Dean Baker is a macroeconomist and senior economist at the Center for Economic and Policy Research in Washington, which he co-founded, and a visiting professor at the University of Utah. His most recent book is “Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer.” The opinions expressed in this commentary are his own. View more opinion on CNN.
On Monday night – and with a Thursday deadline to fund the government bearing down – Senate Republicans blocked a bill that would have suspended the United States’ debt limit. The move puts the country at risk of default, thereby potentially tanking the economy and delaying payments to millions.
This at the same time President Biden and Democrats are advancing a make-or-break effort to pass a multitrillion-dollar, 10-year economic and climate package.
Debt limit negotiations continue – but Biden does have an ace in the hole if Congress doesn’t suspend the debt limit.
Due to a technicality in the law, the Treasury Department can print a platinum coin and assign a huge value to it – say, $1 trillion – and sell it to the Federal Reserve Board. This would get around the need to borrow.
Such a move would be ridiculous, of course, but the whole standoff on the debt is ridiculous. If Senate Minority Leader Mitch McConnell and the Republicans insist on pushing it, Biden could well decide to get out the platinum coin.
Why are we at this point? In the United States, we periodically – like now – get a charade where Republicans and Democrats fight over increasing the debt limit to allow for the borrowing that they have already approved. We will almost certainly get through it – not getting through it would be catastrophic – but there may be a lot of turmoil in financial markets before we do.
It is important to understand what is at stake. Other than Denmark, our country is alone in the world in having a self-imposed limit on the amount of money it can borrow. In other countries, legislatures approve spending and taxes, and governments borrow to cover any gaps.
In the United States, Congress authorizes spending and sets taxing levels, and then separately sets a limit on how much the country can borrow. The debt limit we are about to hit was due to actions of both parties. Much of the recent increase in the debt was incurred by pandemic spending that had overwhelming bipartisan support. But the new spending under President Biden is only a small part of this story.
The tax cuts pushed through earlier by former President Donald Trump and a Republican Congress also played a large role.
Congress has regularly raised the debt limit to allow the Treasury to borrow the money needed to pay our bills, but once again the Treasury is hitting the limits of authorized borrowing. There is some uncertainty about when this will happen, mainly because of the irregularity of tax collections, but the department predicts that it will be some time in mid-October.
If the debt limit is not increased by then, the government will be unable to borrow to cover its normal expenses, including Social Security payments, salaries for government workers and interest payments on the debt.
The debt limit is not a sacred principle in the Constitution. It is simply a quirk in the law that was put in place in 1917 to facilitate borrowing to pay for World War I. It is absurd that it now leads to these high-tension showdowns.
The Democrats have added to the tension by linking the bill raising the debt ceiling to the bill to extend the government’s funding. The bill to extend the government’s funding is absolutely standard.
Congress routinely passes “continuing resolutions” that essentially keep funding in place at the prior year’s level until Congress makes any changes it wants. The fiscal year ends on Thursday, September 30. After midnight, large segments of the government will not have funding to continue to operate.
Hence, if the debt ceiling/continuing resolution bill is not approved, much of the government will have to shut down on Friday. This will include national parks and museums, the Social Security Administration, which processes new benefit claims, and much of the rest of the government. Essential services will be maintained, but close to 60% of the federal workforce may not be working on Friday.
A shutdown would be a major problem for the country. Even a short shutdown will cause major obstacles for an economy already struggling to overcome pandemic-related shortages.
But as bad as a shutdown will be, failing to increase the debt ceiling will be even worse. It means the government will not be able to pay its bills, including pay for soldiers, Social Security checks and interest on government bonds.
This is a game of chicken.
Mitch McConnell wants the Biden administration to pay a big price to get him on board on increasing the debt ceiling. We have been in this situation before.
In 2011, McConnell forced President Barack Obama to accept large cuts to the federal budget. These cuts both crippled several important government agencies, such as the Environmental Protection Agency, the National Park Service and the Justice Department, and slowed the pace of the recovery.
The strong stimulus in the CARES Acts and the American Recovery Act under this administration has led to a rapid, but still not full, recovery from the pandemic recession. The unemployment rate is now down to 5.2% just a year and a half after the start of the recession that had rapidly hiked unemployment in just a few months.
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By contrast, in part due to the spending cuts demanded by McConnell in an earlier standoff 10 years ago, growth in demand, GDP, and employment was very slow following the Great Recession. The unemployment rate did not fall to today’s 5.2% level until July of 2015, almost eight years after the start of that recession.
Which brings us back to that platinum coin. Pulling that out of his back pocket may not be an ideal outcome for Biden, but it is better than letting tens of millions of people go without Social Security or paychecks, and it’s also better than agreeing to wreck the economy to get Republican support for allowing the government to work.