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

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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.

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.

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

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.

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.

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.

 

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.

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.

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