Republicans in Congress have proposed a three-month suspension of the debt ceiling, which if passed would allow the country to borrow enough to continue to pay its debts until mid-May.
The action – which originated in the House – is a tacit admission by House Republican leadership that the debt ceiling issue is a red herring and a distraction and that the real issue continues to be that of spending.
So why is the debt ceiling a distraction? First most government spending either by law or by its nature is indexed to inflation. When costs for a service (health care, say) go up, government has to pay more just to maintain the same level of service. Since the debt ceiling doesn’t automatically rise to allow the higher borrowing to pay for the increased service cost, Congress will either have to agree to a debt ceiling increase or stop borrowing. Good, you say, if you can’t borrow you can’t spend. But artificial borrowing limits simply mean the government looks like a deadbeat that can’t pay its debts. The issue just circles back to spending: what government services do we want and how much are we willing to tax ourselves to pay for them?
Second, entitlement payments such as Social Security are not practically amenable to a debt ceiling. Who wants to tell Aunt Mable or Uncle Melvin that their Social Security check is being reduced because the debt ceiling keeps the government from borrowing enough to pay them in full?
Whoa, you say, that’s not government money. People’s paychecks are taxed 12.4% (6.2% from the worker and a matching 6.2% from the employer) to invest in the Social Security Fund. But like any pension fund, the Social Security Administration didn’t stuff that money in a mattress, they invested it with the U.S. Treasury, which issued bonds to Social Security in the money’s place. Social Security holds some $2.7 trillion of these bonds on which the Treasury pays about 2.4% yearly interest that comes to about $65 billion a year. The problem is that the Treasury didn’t stuff that money in its own mattress, the government spent it, increasing the debt in doing so.
(A related issue: By 2035 all the bond money plus interest in the Social Security Fund will be exhausted and Social Security will have only enough money in current income to pay some 75% of promised benefits. That’s likely to be fundamental to any spending debate.)
Up until last year, Social Security had enough new money coming in from payroll taxes each year to pay out benefits without tapping that bond money. No more, as of 2011 Social Security was paying out more each year than it got in income and is looking to that fund of bonds to pay the rest. Since the government has already spent that bond money, it will have to borrow to pay Social Security back, debt limit or no. The U.S. Treasury also owes some $300 billion it borrowed from the Medicare Fund.
A central reason why we are unlikely to see an unbreakable impasse on the debt ceiling is that we already got a glimpse of what one would do to world markets. In 2011 such an impasse went right up to the wire. Then on August 5, four days after agreement was reached, the credit-rating agency Standard & Poor's downgraded the credit rating of U.S. government bond for the first time in the country's history. Markets around the world as well as the three major indexes in the U.S. then experienced their most volatile week since the 2008 financial crisis with the Dow Jones Industrial Average plunging for 635 points (or 5.6%) in one day. I doubt that any member of Congress on either side of the aisle wants to create that sort of chaos again, chaos that is likely to be far worse than in 2011 if the U.S. actually defaults on its debts.
Finally it seems asinine to me to add as part of the debt ceiling suspension a suspension of congressional salaries if Congress doesn’t act on the ceiling by a given date. Half of Congress’ membership are millionaires who likely wouldn’t be fazed by a pay freeze and could simply vote their consciences (or ideology). The other half would have paychecks held hostage to what might be an otherwise odious deal.