The American public as well as the rest of the world may be getting weary of all the budget wrangling in Congress these past few years, but the biggest fight of all may be still ahead.
According to the U.S. Treasury, the latest debt ceiling was reached on Dec. 31, 2012, and "extraordinary measures" are again being used in order to not exceed that borrowing limit set by Congress. Furthermore, sometime between mid-February and early March 2013, the Treasury expects to run out of tricks and will be left without enough resources to avoid some form of default unless Congress raises the debt ceiling. Even with Friday's offer by House Republicans of a three-month lift of the debt ceiling, which the House will consider this week, this is simply pushing the fight a few more months down the road.
Although all this may look like a replay of August 2011, it's even more serious this time around because it is becoming a pattern. This pattern leads everyone, from American consumers and firms to ratings agencies and creditors, to wonder whether we might actually find ourselves in a position where the U.S. declares that we are unwilling to pay on our obligations. In that case, why would anyone lend to the U.S., do business with the U.S. or even do business in the U.S.? Even the whiff of this possibility is enough to threaten the foundation of our economy.
Luckily, we have plenty of willing creditors at the moment. With interest rates at historic lows, it's actually incredibly cheap for the U.S. government to borrow right now. But that could change suddenly and for a number of different reasons. Two reasons explain each side of the debt ceiling debate. On the one hand, if we rack up enough debt, where the exact amount of "enough" is uncertain, then we will reach a point where the debt is unsustainable. In that case, no one will want to lend to us anymore, and we will be forced to default. So we do need to worry about the national debt. However, worrying about the debt doesn't justify pushing ourselves into default; that's the very thing we should most be trying to avoid!
At this point we need to raise the debt ceiling just to allow for spending that was already agreed to by Congress. Even if the debt ceiling is raised substantially, government spending is determined by the budget set by Congress, not by the amount of borrowing left below the debt ceiling. Congress still has other fights coming on future budget bills, but these could come without the accompanying concern of a willful default. There is enough uncertainty about what the U.S. government is going to do about taxes and spending without throwing in the worry that they may not pay their bills, too.
The best thing to do with the debt ceiling would be to get rid of it altogether. Congress can talk about the debt implications of the budget as they make a budget each year; we don't need any additional budget fights right now, as we've got plenty coming. The debt ceiling may be a useful reminder that a budget that includes a deficit will increase our debt, but in the current political environment it just adds more trouble than it is worth and has become nothing more than an artificial cliff that politicians have been using to play chicken with the American economy.
This is Congress' self-inflicted crisis, but President Obama can do more to explain the debt ceiling to the American public. If people better understood that removing the debt ceiling wouldn't change the rules of federal spending or taxes, then perhaps it would be easier for Congress to get rid of the debt ceiling.
The U.S. Treasury bond is considered the safest asset in the world to hold, precisely because the U.S. government has never defaulted on its legal obligations. We should make sure that this never happens. That means being careful about the national debt, but it also means not being stupid about a debt ceiling that can simply be raised or removed in order to avoid certain default.
This blog post is part of a series produced by The Huffington Post and the George Washington University that closely examines the most pressing challenges facing President Obama in his second term. To read the companion article by HuffPost's Zach Carter and Michael McAuliff, click here. To read the companion blog post by A. Barry Rand of the AARP, click here. To read all the other posts in the series, click here.