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Must reads: Why the federal debt ceiling must be raised now and, ultimately, abolished

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Photo: Getty Images

As Policy Watch reported earlier today [2], U.S. Senate Republicans – including North Carolina’s Thom Tillis and Richard Burr – blocked an attempt by Democrats on Monday evening to begin debate on a broad bill that would avert multiple looming fiscal crises for the federal government.

The measure in question would have kept the government operating past the end of the fiscal year on Thursday, increased the federal government’s borrowing limit (also known as the “debt ceiling”) and approved billions in aid for regions struck by extreme weather.

The debt ceiling debate, in particular, is a matter of great urgency since, without an increase, the nation could face a series of cascading economic and humanitarian crises.

In order to help readers grasp the substance and importance of this debate, Policy Watch is publishing highlights from a pair of timely essays authored by veteran national policy analysts.

In “Failing to suspend or raise debt limit would have wide-ranging effects,” [3] Center on Budget and Policy Priorities Senior Fellow Paul N. Van de Water [4] explores several of the potentially devastating impacts that will result if GOP senators continue to block legislation to raise the borrowing limit.

In “Abolish the debt ceiling before it commits austerity again,” [5] Economic Policy Institute Director of Research Josh Bivens [6] makes a compelling case that the borrowing cap serves no useful purpose and should be repealed.

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[7]Failing to suspend or raise debt limit would have wide-ranging effects
By Paul N. Van de Water

Were the nation to default on its legal obligations for the first time — which will occur if lawmakers don’t raise or suspend the debt limit in the coming days — that would have devastating consequences [8] not only for financial markets and the economy but also for tens of millions of everyday Americans who count on federal services and benefits, for states that count on federal funding for a range of services, and for the businesses and non-profit organizations that do work for or receive funding from the federal government….

…Here are some examples:

  • 65 million Social Security beneficiaries could see their benefits delayed, at least for short periods. Although Social Security has its own trust fund, the Treasury’s inability to prioritize payments could prevent paying benefits on time.
  • 6 million veterans and survivors of veterans receiving compensation or pensions and 22 million low-income households receiving SNAP benefits could have their benefits held up for weeks or months, even as they need to pay their bills and put food on the table.
  • 1.4 million military service members and 3 million federal civilian employees could see their pay delayed — for weeks and months, not just a few days.
  • Funding for Medicaid, the largest source of federal aid to states, and public health would be at risk of cuts, despite the critical need for health care during the pandemic. In April, 82 million individuals were enrolled in Medicaid and the Children’s Health Insurance Program.
  • Head Start agencies could see their funding delayed for lengthy periods, which would leave them without the money to pay their staff and possibly force them to shut down.
  • Highway contractors might not be paid promptly, which would make it hard for them to buy construction materials, pay their workers, and complete their projects.
  • Companies that clean federal offices, provide federal agencies with computers, paper, and other supplies, or sell equipment to the military could all see their payments for the services, supplies, and equipment they provided held up for significant periods, making it hard for these companies to meet payroll and pay their suppliers.
  • Funding to states for K-12 education and child care could be delayed for lengthy periods. This could mean funding shortfalls in school districts around the country, and it could mean that child care assistance programs run short of funds, leaving child care providers — often small businesses and nonprofits — unable to pay rent or their staff.
  • Disaster aid in response to recent hurricanes, floods, fires, and other natural disasters could be delayed, leaving communities without desperately needed assistance.
  • Reductions in agricultural commodity programs and crop insurance would weaken the farm safety net and leave farmers more exposed to the risks of low prices and poor harvests.
  • Doctors could see payments for the care they provide to Medicare patients delayed for weeks or months, making it hard for them to pay their staff and stay in business.
  • Housing assistance payments could become badly delayed, with missed payments over the next year, even though millions of families continue to report that they are not caught up on their rent or mortgage payments. Now that the federal eviction moratorium has expired, the consequences of evictions alone could be severe.

These are just a few examples of what would happen were the federal government to default. If the government’s inability to borrow were brief, some programs and payees might escape relatively unscathed, depending on payment schedules. If the debt limit crisis persisted, however, every federal program and activity would be at risk of substantial reductions or delays in spending.

Click here [3] to read the entire essay.

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[9]Abolish the debt ceiling before it commits austerity again
By Josh Bivens

In a political system beset by many stupid [10] and [11] destructive [12] institutions [13], the statutory limit on federal debt might be the worst.

The debt limit:

  • Measures no coherent economic value. The measure of debt it targets is not inflation-adjusted, would perversely make the debt situation look worse if there was a reform to Social Security that closed that program’s long-run actuarial imbalance, and ignores trillions of dollars in assets held by the federal government.
  • Has no relationship to any economic stressor facing the country—over the past 25 years, as the nominal federal debt rose from $5 trillion to $22.7 trillion, debt service payments (required interest payments on debt) shrank almost in half, from 3.0% of GDP to 1.8%.
  • Can cause real damage if it’s not lifted in the next couple of weeks. It would only take a couple of months of missing federal payments due to the debt ceiling to mechanically send the economy into recession—and that’s without assessing damage it would cause from financial market fallouts.
  • Has been used time and time again to enforce misguided austerity policies. The 2011 Budget Control Act (BCA) grew directly out of a GOP Congress threatening to not raise the debt ceiling absent spending cuts. The BCA provided an anti-stimulus about twice as large as the stimulus provided by the American Recovery and Reinvestment Act (ARRA—commonly known as “The Recovery Act”) and is largely responsible for the sluggish recovery from the Great Recession.

Given all of this, the debt ceiling should be abolished or neutralized in absolutely any way politically possible. It serves no good economic purpose and plenty of malign ones. Below we expand on these points….

Click here [5] to explore the rest of Bivens’ essay.