Toward the end of Animal House, the brothers of Faber College's Delta Tau Chi fraternity are sulking in their living room after being placed on "double secret probation" by the loathsome Dean Wormer. Then one of them, Bluto (played by John Belushi), tells his brothers to wake up, saying, "Nothing is over until we decide it is! Was it over when the Germans bombed Pearl Harbor? Hell no!" Sensing that Bluto had struck a responsive chord, his fellow Delta brother Otter rises to say, "I think that this situation absolutely requires a really futile and stupid gesture be done on somebody's part!"
I have been thinking of this scene lately, as some in Washington embrace the ultimate futile and stupid gesture of threatening not to raise America's debt ceiling. The big difference between the Delta brothers' gesture and Washington's are the stakes. The Delta guys just ruined the Faber College homecoming parade. Washington could ruin America's credit rating, and, potentially, the global economy.
Congress first created the debt ceiling during World War I to give the Treasury department more flexibility to issue and manage debt, while still maintaining Congressional authority to ensure debt didn't rise too high. The idea hasn't worked. In 1917, America's total national debt was about $112 billion in today's dollars. Today, our debt is over $31 trillion, or more than 275 times larger than when the debt ceiling was created.
The idea of a debt ceiling has been a futile policy, which probably explains why the U.S. is one of only two democratic countries in the world (along with Denmark) that has one. An idea like the debt ceiling could only be cooked up in Washington; instead of restraining Congress from spending taxpayer money, it invites our legislators to run up debt first and then debate and decide later whether to pay for it - or not.
As futile as it is, the debt ceiling has historically been harmless, as Congress raised it 78 different times, usually uneventfully and under both Democratic and Republican administrations. That all changed in 2011 when a small group of far-right House Republicans decided to do the "stupid." They held the debt ceiling vote hostage, saying they wouldn't raise the ceiling unless the Obama administration agreed to significant domestic spending cuts. They ended up with the "futile" because, in the end, the extremists in the House folded. But not before causing chaos in financial markets and compelling the S & P ratings agency to downgrade the safety of U.S. Treasury debt for the first time in our history.
In explaining its decision in 2011, S & P wrote, "The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed." It sounds frighteningly similar to the brinkmanship happening around the debt ceiling in Washington today.
To understand why messing with the debt ceiling is so stupid, you just need to understand that every American benefits enormously from the fact that investors and governments around the world believe we, the United States of America, are a country that always pays its debts on time. A U.S. Treasury bond is considered the closest thing there is to a "risk free" asset in the world. That is why so many transactions globally are conducted in dollars, and why the Treasury market is viewed as "the circulatory system of the global economy," according to the chief economist at Brown Brothers Harriman. This benefits U.S. businesses, who get more access to capital, and consumers, who can access lower cost loans because almost every kind of loan is pegged into the interest rate for U.S. Treasuries.
If a moment arrives when people don't think the U.S. will repay its debts, investors will demand a higher risk premium in the form of higher interest rates. And the costs would be massive. Credit for business, home, car, and student loans could become less available and more expensive. According to Moody's, another credit ratings agency, a debt "default could have similar macroeconomic consequences to the Great Recession of 2008 - 2009: "a 4 percent GDP decline, nearly 6 million lost jobs and an unemployment rate of 9 percent." Last year alone, the U.S. paid $475 billion in interest on America's outstanding debt, a figure that could grow significantly if a default forces interest rates even higher. Just the threat of a default, however remote it may seem, moves the markets.
Right now, the leaders that matter most for a debt ceiling negotiation - President Biden and House Speaker Kevin McCarthy - aren't even talking, even though the "x" date for the debt ceiling - the date after which the Treasury may not be able to pay its bills - is approaching in August. It's the ultimate game of brinksmanship, with the American public being the ones who suffer the most.
President Biden has dug in, saying he'll only sign a clean debt ceiling increase with no conditions, while Speaker McCarthy is holding out for spending cuts. It was reported recently that several members of the bipartisan Problem Solvers Caucus have spent weeks constructing a "break-glass deal" in case the country goes all the way to the brink on the debt ceiling. It's a welcome development but anything that emerges from this bipartisan group is likely to just be a temporary solution that sets up another bigger debt ceiling fight down the road.
That's why Congress should abolish the debt ceiling entirely. Take it off the table. It forces Congress and the President to act against the best interests of America. It is futile and it enables and encourages our leaders to do something stupid. Of course, many elected officials would never support abolishing the debt ceiling unless it was accompanied by a real plan to reign in American's underlying debt problem, which has indeed reached crisis level proportions. America's current national debt today is six times as big as it was at the turn of the 21 century and is bigger as a share of our economy than any time since World War II. We need to get our fiscal house in order, but we should not destroy the economic standing of the United States in the process.
Getting rid of the debt ceiling in exchange for getting America's fiscal house in order is the grand bargain America needs. It may seem unlikely, but it won't be futile or stupid.
Do you remember what happened at the end of Animal House? John Blutarsky (Bluto) was last shown driving away from Faber College to become A UNITED STATES SENATOR.
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