By Peter Orszag
November 21, 2022 at 9:51 a.m. EST
Peter R. Orszag, the chief executive of financial advisory at Lazard, is a former director of the Office of Management and Budget and the Congressional Budget Office.
Could 2023 be the year when the debt-ceiling time bomb finally explodes?
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In October, House Minority Leader Kevin McCarthy (R-Calif.) warned that Republicans are planning to use the debt limit as leverage to demand spending cuts, potentially including Social Security and Medicare — cuts that President Biden will not accept. Now that Republicans have won control of the House and McCarthy is potentially the next speaker, the threat is real. And this time, thanks to shifting political forces and lower levels of liquidity in the Treasury market, the peril is greater than it has ever been before.
This makes the upcoming lame-duck session of Congress the most consequential since at least 1974. It would be wise to find a way to raise the debt ceiling before control of the House changes.
The debt ceiling — now $31.4 trillion, a level that stands to be pierced by the third quarter of 2023 — is an anachronism. Congress enacts changes to tax law and entitlement programs (such as Social Security and Medicare), and sets non-entitlement spending each year. These decisions, in turn, exhaust the policy levers available to control the level of U.S. government debt. (The evolution of debt is also influenced by the economy, market interest rates and other factors, but those are mostly outside the control of policymakers.) So having a separate limit on the permitted level of debt is redundant.
As the Government Accountability Office has written, “The debt ceiling does not control the amount of debt. Instead, it is an after-the-fact measure that restricts the Treasury’s ability to borrow to finance the decisions already enacted by Congress and the President.”
If the debt limit were merely a mundane accounting constraint regularly adjusted by Congress and the White House to reflect already-enacted policies, it might be harmless. But politicians have learned to wield it as a weapon.
It is a particularly dangerous one in today’s highly polarized environment, because political norms that governed past negotiations — in particular, the idea that avoiding default is paramount — might no longer hold. In a world with unclear exit ramps on crucial issues including the war in Ukraine and growing tension with China, there’s no need for a new Gordian knot around the debt limit.
Nor is this a good time to raise further questions about our country’s willingness to break our own laws and norms, an issue frequently raised by business executives and leaders across the globe.
Another new concern centers on signs of lower liquidity in the Treasury market. In July 2021, the Group of Thirty, an independent organization of economic thinkers, reported that “the aggregate amount of capital allocated to market-making by bank-affiliated dealers has not kept pace with the very rapid growth of marketable Treasury debt outstanding.” Other analysts point to reduced purchases of Treasurys by foreigners as a contributing influence; the Federal Reserve’s shift from expanding to shrinking its balance sheet is likely another exacerbating factor.
Whatever the cause, lower levels of liquidity in the Treasury market are driving increased volatility. Treasury Secretary Janet L. Yellen is considering efforts to attenuate the stresses, including a potential Treasury buyback program and greater transparency. It is far from clear what steps will work, but what the Treasury market definitively does not need is heightened uncertainty over the debt ceiling. Jitters over lower liquidity in Treasurys make threats to the debt limit more dangerous than in the past.
There are two ways to de-risk the situation in the lame-duck session of Congress. One is regular order, which would require the cooperation of Senate Minority Leader Mitch McConnell (R-Ky.) and a number of sitting Republican senators wise enough to join Democrats to address the issue now. But this may well not happen.
The other option involves a new budget resolution, which would facilitate using the reconciliation process to raise the debt limit, as was done in 1990, 1993 and 1997. This approach would require two votes — the first on the budget resolution and the second on reconciliation. It would take up about two weeks of Senate floor time, but it could be accomplished with only 50 votes.
Any Democrats averse to taking such a painful vote now should consider how much leverage their party will lose once Republicans control the House — and how much higher the risk of default will be then. It’s generally not a good idea to enter a negotiation with a ticking time bomb and a counterparty willing to let it go off.
The next two years will be turbulent in any case. The president and Congress can make them less risky by addressing the debt limit in December.
November 21, 2022 at 9:51 a.m. EST
Peter R. Orszag, the chief executive of financial advisory at Lazard, is a former director of the Office of Management and Budget and the Congressional Budget Office.
Could 2023 be the year when the debt-ceiling time bomb finally explodes?
Sign up for a weekly roundup of thought-provoking ideas and debates
In October, House Minority Leader Kevin McCarthy (R-Calif.) warned that Republicans are planning to use the debt limit as leverage to demand spending cuts, potentially including Social Security and Medicare — cuts that President Biden will not accept. Now that Republicans have won control of the House and McCarthy is potentially the next speaker, the threat is real. And this time, thanks to shifting political forces and lower levels of liquidity in the Treasury market, the peril is greater than it has ever been before.
This makes the upcoming lame-duck session of Congress the most consequential since at least 1974. It would be wise to find a way to raise the debt ceiling before control of the House changes.
The debt ceiling — now $31.4 trillion, a level that stands to be pierced by the third quarter of 2023 — is an anachronism. Congress enacts changes to tax law and entitlement programs (such as Social Security and Medicare), and sets non-entitlement spending each year. These decisions, in turn, exhaust the policy levers available to control the level of U.S. government debt. (The evolution of debt is also influenced by the economy, market interest rates and other factors, but those are mostly outside the control of policymakers.) So having a separate limit on the permitted level of debt is redundant.
As the Government Accountability Office has written, “The debt ceiling does not control the amount of debt. Instead, it is an after-the-fact measure that restricts the Treasury’s ability to borrow to finance the decisions already enacted by Congress and the President.”
If the debt limit were merely a mundane accounting constraint regularly adjusted by Congress and the White House to reflect already-enacted policies, it might be harmless. But politicians have learned to wield it as a weapon.
It is a particularly dangerous one in today’s highly polarized environment, because political norms that governed past negotiations — in particular, the idea that avoiding default is paramount — might no longer hold. In a world with unclear exit ramps on crucial issues including the war in Ukraine and growing tension with China, there’s no need for a new Gordian knot around the debt limit.
Nor is this a good time to raise further questions about our country’s willingness to break our own laws and norms, an issue frequently raised by business executives and leaders across the globe.
Another new concern centers on signs of lower liquidity in the Treasury market. In July 2021, the Group of Thirty, an independent organization of economic thinkers, reported that “the aggregate amount of capital allocated to market-making by bank-affiliated dealers has not kept pace with the very rapid growth of marketable Treasury debt outstanding.” Other analysts point to reduced purchases of Treasurys by foreigners as a contributing influence; the Federal Reserve’s shift from expanding to shrinking its balance sheet is likely another exacerbating factor.
Whatever the cause, lower levels of liquidity in the Treasury market are driving increased volatility. Treasury Secretary Janet L. Yellen is considering efforts to attenuate the stresses, including a potential Treasury buyback program and greater transparency. It is far from clear what steps will work, but what the Treasury market definitively does not need is heightened uncertainty over the debt ceiling. Jitters over lower liquidity in Treasurys make threats to the debt limit more dangerous than in the past.
There are two ways to de-risk the situation in the lame-duck session of Congress. One is regular order, which would require the cooperation of Senate Minority Leader Mitch McConnell (R-Ky.) and a number of sitting Republican senators wise enough to join Democrats to address the issue now. But this may well not happen.
The other option involves a new budget resolution, which would facilitate using the reconciliation process to raise the debt limit, as was done in 1990, 1993 and 1997. This approach would require two votes — the first on the budget resolution and the second on reconciliation. It would take up about two weeks of Senate floor time, but it could be accomplished with only 50 votes.
Any Democrats averse to taking such a painful vote now should consider how much leverage their party will lose once Republicans control the House — and how much higher the risk of default will be then. It’s generally not a good idea to enter a negotiation with a ticking time bomb and a counterparty willing to let it go off.
The next two years will be turbulent in any case. The president and Congress can make them less risky by addressing the debt limit in December.
