Debt ceiling drama a 'farce' since US can't legally default: economist (2023)

Congress is at a familiar crossroads in 2023. Since 1960, elected representatives have acted on the debt ceiling 78 times to avoid default.

As the U.S. breaches its current $31.4 trillion ceiling, the Treasury Department is taking “extraordinary measures” to avoid default. Those measures will help stave off decision-making time until June, but Congress theoretically must lift the borrowing cap by then to continue paying the bills.

But is that practically true? Will the government default on its debt if the ceiling isn’t raised? According to economist James Galbraith, a former executive director of the U.S. Joint Economic Committee, the government legally can’t default, even absent congressional action.

“This is a political show,” Galbraith said. “It’s a bit of a farce, which has been played out many, many times. It’s surprising that people aren’t tired of it or questioning the reality of what they’re saying about it.”

According to Galbraith, the current Lloyd M. Bentsen Jr. Chair in Government/Business Relations at University of Texas at Austin, the Treasury cannot stop payments on any of its legal obligations, “debt ceiling or no debt ceiling.”

“Interest payments are required, Social Security payments are allocated by law, civil service salaries are allocated by law and military expenditures are allocated by law. The laws exist. So you can say, ‘Well, there’s this other law which says they can’t exceed the debt ceiling.’ That’s a bit like saying that you’re holding up the stop sign in the middle of the interstate highway. You can hold it up. That doesn’t mean traffic is going to stop,” he said.

The current debt-ceiling showdown was easily foreseen when Republicans gained control of the House in the midterms, with a vocal minority calling for cuts to Medicare and Social Security in exchange for raising the debt ceiling. But those cuts do not have widespread support within the Republican party.

“Under no circumstances should Republicans vote to cut a single penny from Medicare or Social Security,” former President Donald Trump, who is again running for the executive office in 2024, said in a video message.

(Video) Debt ceiling drama a ‘farce’ since US can’t legally default: economist

On the flip side, dozens of House Democrats have pitched legislation that would do away with the debt ceiling altogether.

Watch the full interview above for more on Republican and Democratic debt ceiling proposals, along with Galbraith’s take on minting a trillion-dollar coin to pay debts.

  • Donald Trump
  • U.S. Treasury Department
  • Social Security
  • U.S. Congress
  • House Republicans
  • Medicare
  • House Democrats
  • Debt ceiling
  • Trillion-dollar coin
  • James Galbraith

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SIMONE DEL ROSARIO: There’s no better example of Congress governing from crisis-to-crisis than the debate over raising the debt ceiling.

(Video) Debt Ceiling | Bloomberg Surveillance 01/20/2023

Remember, raising the debt limit doesn’t authorize new spending, but it does allow the government to continue to borrow to pay its existing financial obligations.

While it makes for great political fodder, Congress has always met the call to avoid default. In fact, since 1960, it’s acted on the debt ceiling 78 times.

Despite hitting the debt limit this time on January 19th, the Treasury has taken “extraordinary measures” to avoid a default. But it’s only temporary.

We’ve got a bunch of options on the table for dealing with the current situation.

Congress can simply raise the debt ceiling.But the more conservative branch of the Republican party, which currently controls the House, is demanding significant spending cuts before raising it.

On the other side, dozens of House Democrats have pitched legislation to do away with the debt ceiling altogether.

Then there is the far-out option that would allow the Treasury to mint a platinum trillion dollar coin.

(Video) Economist Perspective: Debt Ceiling

Let’s dig into it with economist James Galbraith, who previously served as Executive Director of the Joint Economic Committee of Congress and is now Chair of Government and Business Relations at UT Austin.

James, Washington is heading for a showdown, that’s for sure. But what would happen if Congress doesn’t meet its deadline and does default? It’s never happened so we don’t really know.

JAMES GALBRAITH: Well, it has never happened for a reason, which is that practically speaking, and legally speaking, constitutionally speaking, it can’t happen. And since it can’t happen, it won’t happen. The Treasury Secretary Yellen just two days ago on her trip to Senegal held a press conference and she made some very important clarifications and points, one of which is that the Treasury is not set up in such a way that it can stop payments on anything. It simply does these things automatically, according to law. And every one of those payments is required by law. It’s part of, it’s authorized by Congress. It’s appropriated. It is a legal mandate, so that they couldn’t stop them without congressional authorization to do so, debt ceiling or no debt ceiling. So a lot of what’s being talked about in terms of even in your introduction about the possibility of default or the kind of crisis that might occur. It’s a scenario, which as I say, it can’t happen and therefore it won’t happen.

SIMONE DEL ROSARIO: So if legally the Treasury still has to keep making these payments, but Congress holds the purse strings, if Congress doesn’t allocate this money, what is the Treasury left to do?

JAMES GALBRAITH: Congress has allocated the money. Congress has,from the beginning, interest payments are required, Social Security payments are allocated by law, civil service salaries are allocated by law and military expenditures allocated by law. The laws exist. So you can say, well, there’s this other law which says they can’t exceed the debt ceiling. Well, that’s a bit like saying like that you’re holding up the stop sign in the middle of the interstate highway, you can hold it up, that doesn’t mean the traffic is going to stop. In fact, not much will happen. So that’s really the way to think about this.This is a political show. It’s a bit of a farce, which has been played out many, many times. It’s surprising that people aren’t tired of tired of it or questioning the reality of what they’re saying about it. And they’re political reasons on both sides to play this up. But that doesn’t mean that they’re, they’re speaking to economic or for that matter, legal realities.

SIMONE DEL ROSARIO: Some Democrats want to abolish the debt ceiling altogether. If we look at it from a consumer standpoint, you know, I can’t imagine a credit card company telling the consumer, “Here you go, here’s no limit, spend whatever you want,” especially a consumer that’s holding over $31 trillion in debt. Would abolishing the debt ceiling be a ticket to irresponsible spending?

JAMES GALBRAITH: No, Congress has allocated that spending, it’s required by law, my social security payment, and Medicare payment is not irresponsible. Those things have been provided for a long time. Interest payments are required by law, they’re not irresponsible. One can have an argument about the whole scale of these things, and that’s underlying this, that is such an argument, but using the debt ceiling as leverage to change the fundamental structure of commitments of the American government tactic, which can only work if, in particular, the Democrats and the administrations cave into it, if they don’t cave into it will be exposed as an empty tactic. The problem here is that they have always, as Democrats, have always and for many years used the threat of some kind of calamity of financial markets, this or that, as a reason for doing what they pretend is otherwise an unpleasant obligation to raise the debt ceiling. And they say we did it, but we had to do it, because otherwise something bad would have happened. Well, now what’s happening is that you have on the Republican Party, a small group of very determined people, you called them conservatives, I don’t know that that’s correct. Nevermind. That small group, we know who they are, who are calling that bluff. And so now the Democrats run the risk of being trapped by their own past and ongoing rhetoric of doom and gloom in this question, and that’s a danger. That means you could have the Congress coming in and everybody saying, oh dear, we really do have to cut Social Security in order to justify passing an increase in the debt limit. And that has happened in the past, that kind of thing. And it could happen this time. But that’s the real danger. If they said, No, we’re not we’re not playing this game, we’re going to basically expose this as the gimmick that it is by, for example, minting the platinum coin, then, you know, it would be it would clearly deflate that particular political story. We would see what would happen and my very confident view is that what would happen would be nothing much.

(Video) House Speaker McCarthy renews calls for spending cuts as federal debt limit looms

SIMONE DEL ROSARIO: Let’s talk about the gimmick. You mentioned the trillion dollar coin. I don’t know if it’s a gimmick or not. The idea has been pushed for over a decade to mint a platinum coin because the Treasury has this authority. Treasury Secretary Janet Yellen, she’s not a fan of it, hasn’t specifically said I absolutely will not do it. I guess that would come from the President. But does this become a real option? And should it?

JAMES GALBRAITH: Well, it is an option. It is something which is authorized by law. The law was passed in the late 1990s. The idea here was something different, it was to create a bullion coin that that could be sold to collectors and basically fund the operation of the mint, which was successful. But the law is very broadly drafted, and so Secretary Yellen, on her own authority under the law, can put any number she wants on a coin and take it over to the Federal Reserve, the Federal Reserve accepts it, and reduces the debt that the government owes to the Federal Reserve, which is an internal accounting matter. And the debt ceiling is no longer even close to being breached. And so it’s very simple could be done very quickly, Secretary yellen says it’s a gimmick and she’s correct. But it exposes the fact that the debt ceiling is also a gimmick. And so from that point of view, it just clarifies what we’re talking about here, which is essentially a bookkeeping exercise, and nothing more than that. That strikes me something that’s really, I mean, it was a very ingenious discovery that the law would permit you to do this. The advantage of it is, it is actually already on the books and something which was considered in the Obama years. And I read the other day that the President actually did consider it at that time, which I didn’t know. So it’s something, it’s one way out. But it’s real value, which is exposing the debt limit for what it is, which is essentially a very artificial, symbolic piece of legislation.

SIMONE DEL ROSARIO: I’d love for you to expand a little bit on that you’ve called the debt ceiling a farce, a ruse. Why is it that?

JAMES GALBRAITH: Why is the debt ceiling a farce? Well, it’s a show which has been running since 1917. Even in the administration of of Ronald Reagan, it was raised, I think, 17 times. So every time they come around, they have a back and forth on this question, and the press, which loves to have crises to report on, reports that the world is on the brink of some major calamity, and then it evaporates. Well, that strikes me as a fairly good definition of a farce. Let me come back to something else, though, that Secretary Yellen said the other day in Africa. The Treasury has no ability to prioritize, which is one thing that some Republicans in particular have suggested, that the Treasury pay interest but not pay Social Security or delay that payment or that payment, can’t do it. They don’t have the software written that would permit them to do that. They can’t do it under the law. And Secretary Yellen said very clearly that every one of these payments, whether it’s for debt or for some other purpose, is an obligation of the United States and failure to pay any of them would constitute effectively a default. And they’re not set up to do it. They’re not going to default. So I think she was pretty clear. And even though she continued with what she was saying about this being a big financial risk, she was very clear that debt ceiling or no debt ceiling, the United States governors not going to default on any obligation.

SIMONE DEL ROSARIO: Well, I’ll tell you, you put our minds at ease a little bit when it comes to this debt ceiling debacle. James Galbraith, Chair of Government and Business Relations at UT Austin, thank you so much for your time today.

JAMES GALBRAITH: Thank you very much. Good to be with you.

FAQs

What is the U.S. national debt ceiling? ›

In the United States, the debt ceiling or debt limit is a legislative limit on the amount of national debt that can be incurred by the U.S. Treasury, thus limiting how much money the federal government may pay on the debt they already borrowed.

How many times has the debt ceiling been raised? ›

Congress has always acted when called upon to raise the debt limit. Since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit – 49 times under Republican presidents and 29 times under Democratic presidents.

How many countries have debt ceilings? ›

Poland is the only nation with a constitutional limit on public debt, set at 60% of GDP; by law, a budget cannot pass with a breach in place.

Is the U.S. in debt? ›

As of December 2022 it costs $210 billion to maintain the debt, which is 15% of the total federal spending. The national debt has increased every year over the past ten years.

What happens if the U.S. defaults on its debt? ›

Because U.S. debt is considered the bedrock of the global financial system, due in part to its stability, a default could shake economies across the world. Americans could also face a recession, including higher unemployment, and the stock and bond markets would likely plunge.

Can the U.S. ever pay off the national debt? ›

Can the U.S. Pay Off its Debt? As budget deficits are one of the factors that contribute to the national debt, the U.S. can take measures to pay off its debt through budget surpluses. The last time that the U.S. held a budget surplus was in 2001.

Who owns the most U.S. debt? ›

  1. Japan. Japan held $1.3 trillion in Treasury securities as of May 2022, beating out China as the largest foreign holder of U.S. debt. ...
  2. China. China gets a lot of attention for holding a big chunk of the U.S. government's debt. ...
  3. The United Kingdom. ...
  4. Ireland. ...
  5. Luxembourg.

Has america ever hit the debt ceiling? ›

Although Senate Republicans refused to raise the ceiling, insisting that Democrats were acting on their own as they controlled the House and Senate, the ceiling was raised in December. On January 19, 2023, the ceiling stood at $31.4 trillion, and the United States hit its ceiling.

Who is United States in debt to? ›

There are two kinds of national debt: intragovernmental and public. Intragovernmental is debt held by the Federal Reserve and Social Security and other government agencies. Public debt is held by the public: individual investors, institutions, foreign governments.

Why the U.S. will always be in debt? ›

Since the government almost always spends more than it takes in via taxes and other revenue, the national debt continues to rise. To finance federal budget deficits, the U.S. government issues government bonds, known as Treasuries.

What country is the deepest in debt? ›

You might be surprised. According to data published by London-based investment fintech Invezz, Japan, Greece, Italy, Portugal, and the US are the top five countries with the highest level of government debt.

Which country has the lowest debt in the world? ›

Countries with the Lowest National Debt
S.NoCountriesDebt to GDP ratio
1.Brunei3.2%
2.Afghanistan7.8%
3.Kuwait11.5%
4.Democratic Republic of Congo15.2%
4 more rows

What countries owe the US money? ›

Despite substantial debts that America owes to countries like China and Japan, they owe us money as well.
...
Debts and Debtors of the US Government.
Country NameValue of Holdings (Billions of $)
All Other (Place this on the United States itself)482.5
Japan1,090.8
Mainland China1,058.4
Ireland288.2
31 more rows

How much does the US owe China? ›

2021, China owns $1.095 trillion of the total $28 trillion U.S. national debt.

How much is America worth? ›

United States - Federal Government; Net Worth (IMA), Level was -20997153.00000 Mil. of $ in July of 2022, according to the United States Federal Reserve.

What would happen if the United States stopped paying off its debt? ›

First, the government might delay payments to Social Security recipients and federal employees. Next, the government would be unable to service its debt or pay interest to its bondholders. U.S. debt is sold to investors as bonds and securities to private investors, corporations or other governments.

Can you go to jail for not paying debt in USA? ›

You can't be arrested for debt just because you're behind on payments. No creditor of consumer debt — including credit cards, medical debt, a payday loan, mortgage or student loans — can force you to be arrested, jailed or put in any kind of court-ordered community service.

How can America get out of debt? ›

Raising taxes and cutting spending are two of the most popular solutions for reducing debt, but politicians may be hesitant to do both. Diverting spending from the military to other sectors may boost job growth, which could spur consumer spending and help the economy.

Who owns our national debt? ›

The public owes 74 percent of the current federal debt. Intragovernmental debt accounts for 26 percent or $5.9 trillion. The public includes foreign investors and foreign governments. These two groups account for 30 percent of the debt.

Which president eliminated the national debt? ›

However, President Andrew Jackson shrank that debt to zero in 1835. It was the only time in U.S. history when the country was free of debt.

Does debt go away after 7 years in USA? ›

In most states, the debt itself does not expire or disappear until you pay it. Under the Fair Credit Reporting Act, debts can appear on your credit report generally for seven years and in a few cases, longer than that.

Who owns all of the land in the US? ›

Private individuals and corporations own about 60 percent of U.S. land while Federal, State, and local governments own the rest.

Has the United States ever had zero debt? ›

As a result, the U.S. actually did become debt free, for the first and only time, at the beginning of 1835 and stayed that way until 1837. It remains the only time that a major country was without debt. Jackson and his followers believed that freedom from debt was the linchpin in establishing a free republic.

When was the last time the US debt was balanced? ›

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In fact, the last time the U.S. was able to completely pay off the national debt was about 186 years ago — back in 1835. Since the early 2000s, the national debt has consistently increased.

Who owns the most US dollars? ›

Americans own 70% of U.S. debt, but China, Japan loom large

By and large, Americans. Some 70% of the national debt is owned by domestic government, institutions investors and the Federal Reserve. A shade under 30% is owned by foreign entities, according to the latest information from the U.S. Treasury.

Does America owe China money? ›

How much money does the U.S. owe to China? China owns roughly $1.08 trillion worth of U.S. debt. 2 This amount is subject to market fluctuations. The value will change whenever China trades Treasury securities or when the prices of those bonds change.

Why can't the US make more money to get out of debt? ›

Unless there is an increase in economic activity commensurate with the amount of money that is created, printing money to pay off the debt would make inflation worse. This would be, as the saying goes, "too much money chasing too few goods."

What will happen if the US debt continues to rise? ›

The higher the national debt becomes, the more the U.S. is seen as a global credit risk. This could impact the U.S.'s ability to borrow money in times of increased global pressure and put us at risk for not being able to meet our obligations to our allies—especially in wartime.

What foreign country owes the US the most debt? ›

CharacteristicSecurities in billion U.S. dollars
Brazil237.6
France232.8
Canada214.1
India212
9 more rows
Oct 17, 2022

What countries have no debt? ›

There are countries such as Jersey and Guernsey which have no national debt, so the pay no interest. All this started with the Napoleonic wars when the government borrowed money to fund the war. Income tax was created to pay the interest ans the capital has just gone on growing and growing.

Which country is in debt trap? ›

The term was coined by Indian academic Brahma Chellaney to describe how the Chinese government leverages the debt burden of smaller countries for geopolitical ends. Other analysts have described the idea of a Chinese debt trap as a "myth" or "distraction".
...
Africa.
Year$ (billions)
201513
201630
10 more rows

Which country has the best economy? ›

With a GDP of 23.32 trillion dollars, the USA is by far the world's largest economy in this ranking for 2021. It is followed by China in second place with a GDP of 17.73 trillion dollars. Canada is also quite far ahead in the international comparison and occupies the ninth place in this ranking.

Is China in a debt crisis? ›

Excessive debt is one of the greatest challenges facing the Chinese economy. In September 2021, non-financial liabilities stood at 264.8 percent of GDP (Caixin, November 3, 2021).

Has the U.S. ever hit the debt ceiling? ›

That month, Congress voted to increase it by $2.5 trillion, which President Biden signed into effect on December 16, 2021. At that point, it was set at about $31.4 trillion. On January 19, 2023, the United States again reached the debt ceiling.

How high can the U.S. debt go? ›

The last time the debt ceiling was hit was Aug. 1, 2021; that limit was $28.4 trillion. 3 If the ceiling hadn't been raised or suspended, the Treasury Department would not have been be able to issue more Treasury bonds, which bring in revenue to help pay bills.

Who does the U.S. owe the most national debt to? ›

  1. Japan. Japan held $1.3 trillion in Treasury securities as of May 2022, beating out China as the largest foreign holder of U.S. debt. ...
  2. China. China gets a lot of attention for holding a big chunk of the U.S. government's debt. ...
  3. The United Kingdom. ...
  4. Ireland. ...
  5. Luxembourg.

When did the US national debt hit 1 trillion? ›

The national debt increased by $1.9 trillion during FY2009, versus the $1.0 trillion increase during 2008. The Obama Administration also made four significant accounting changes to more accurately report total federal government spending.

Videos

1. Debt ceiling showdown starts on Capitol Hill
(CBS News)
2. What Happens If The U.S. Can’t Pay Its Debt?
(CNBC)
3. A Fiscal Cliff: New Perspectives on the U.S. Federal Debt Crisis
(The Cato Institute)
4. The Debt Limit Explained
(CGP Grey)
5. Hot Money | Global Financial System | Economy | Finance Documentary | Jeff Bridges
(Moconomy)
6. Target: Inflation | Bloomberg Surveillance 10/05/2022
(Bloomberg Markets and Finance)
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