U.S. careening toward self-inflicted debt debacle

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This article was published 05/04/2023 (1105 days ago), so information in it may no longer be current.

THE possibility of the U.S. federal government defaulting on its debt payments is growing and could materialize in a matter of months.

If so, it will send shockwaves through a global economy still dealing with a fragile pandemic recovery, war in Europe, stubborn inflation and the mounting effects of the climate crisis.

As a check on power, U.S. law stipulates that Congress must regularly vote to increase the national debt limit. This is the total sum the federal government can borrow to cover its bills, such as social security and Medicare benefits, public sector and military salaries, tax refunds, interest payments on existing debt and more.

The current limit of US$34.1 trillion was already reached in January, forcing Treasury Secretary Janet Yellen to enact short-term “extraordinary measures” to avoid Washington defaulting on its obligations.

A report released on Feb. 15 by the Congressional Budget Office, a federal agency that monitors government spending, estimates these emergency actions — essentially one-off accounting tricks — will be used up sometime between July and September.

Despite the way raising the debt ceiling has become a near-annual exercise in political grandstanding on both sides of the aisle, the U.S. has never defaulted. But recent history proves once-unthinkable events can no longer be written off as impossibilities; with partisan hostility and brinkmanship in Washington running dangerously high, there are rumblings that this time could be different.

To agree to raise the cap on federal borrowing, Republican lawmakers under new House Speaker Kevin McCarthy are demanding the Biden administration enact tax cuts and curb its spending promises enough to ensure the U.S. federal government can erase its current US$1-trillion-plus deficit within 10 years. Democrats seem dead-set against any of this.

U.S. President Joe Biden has proposed a minimum 25 per cent tax on billionaires, alongside higher taxes on capital gains and corporations. These levies are meant to fund his party’s key legislative victories, including the Inflation Reduction Act, which calls for enormous investments into U.S. manufacturing, infrastructure and prescription-drug coverage for millions of seniors, as well as aggressive action on climate change.

This economic agenda is widely expected to underpin Biden’s imminent re-election campaign ahead of polls in 2024.

Even if good-faith negotiations do happen, some fear a radical far-right faction within the GOP congressional caucus backed by Donald Trump could end up sabotaging the process anyway. Composed of about 20 people, the so-called “MAGA Squad” of Republican firebrands and Trump acolytes is led by representatives Marjorie Taylor Greene of Georgia, Lauren Boebert of Colorado — both public supporters of QAnon conspiracy theories — and Matt Gaetz of Florida.

Espousing an isolationist, “America First” mentality, they have made a point of calling for an end to U.S. aid to Ukraine, with Gaetz on Feb. 9 tabling a “Ukraine Fatigue Resolution” in the House of Representatives. Two weeks later, Taylor Greene told CNN the US$113 billion in military and financial support the U.S. has provided to Kyiv thus far “hasn’t done anything for our border, and our people.”

In a recent interview, Jacob Heilbrunn, an expert on American conservatism at the Atlantic Council think tank, warned some Republican extremists are keen to see the federal government grind to a halt: “There are widespread fears in Washington and the financial community that this hardline faction within the GOP will seek to trigger a new Great Depression in the name of reducing the deficit, but in reality, in tarring Biden as someone who destroyed the American economy.”

Failing to raise the debt ceiling could achieve just that.

On March 6, the chief economist of financial services company Moody’s Analytics told a Senate economic policy committee that America missing its debt payments for more than a month would shave 4 per cent off its GDP and plunge the world’s largest economy into a recession akin to the aftermath of the 2008 financial crisis. Upwards of six to seven million jobs could evaporate.

Economic ruin in America would quickly morph into financial contagion, hitting Canada in short order before spreading throughout the global economy.

But a prolonged recession would harm developing countries the most. The type of social and political meltdown that happened in Sri Lanka last year could be repeated in several other nations struggling with food insecurity and teetering on the brink of insolvency, such as Lebanon, Pakistan and Tunisia.

Therefore, in the interests of both the U.S. and the wider world, it doesn’t really matter who blinks first in this partisan debt-ceiling showdown — just as long as someone does.

Kyle Hiebert is a Winnipeg-based researcher and analyst, and former deputy editor of the Africa Conflict Monitor.