Calibrate Your Anxiety: The Debt Ceiling!
Smart people explain things to me
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The last article I read before I went to bed on Tuesday was about the debt ceiling (here is an explainer). It was titled, “Yellen Warns of ‘Catastrophic’ Consequences From Debt Limit Breach.” On Wednesday morning, I was still thinking about it. The debt ceiling issue falls into the category of Things I’d Like To Think I Understand But Also Dread Having To Explain Aloud Because I’m 99 percent Certain I’d Make Myself Look Foolish.
The contours of the debt ceiling are fairly easy to understand — America defaulting on its debt: catastrophic and therefore…unlikely? I mean, maybe? Wait. Here’s a Washington Post reporter’s take from Wednesday (FWIW: there’s quite a bit of pushback to this in the comments/quote tweets):
I’ll admit to not knowing what I should do with my concern here. In another era, this unlikely reality of default (which Congress is fully in control of preventing) would probably be enough for me to just retreat back to my usual domains (complaining about Facebook, probably). But the last five or so years have, uh, raised my anxiety about low probability events happening. My compass has been magnetized. I no longer know how worried I should be about most things. I tweeted this:
Minutes later, I decided to be the change I want to see in the world. Perhaps it could be a recurring newsletter segment: How Worried Should You Be? Feat. A Smart Person. Or Calibrate Your Anxiety! (Side note: I kind of want to build a little ‘worry matrix’ chart…if any of you smart people want to help me make one)
I did a little reading around for somebody who might be able to explain this in a clear, concise way and found James Fallows (a long-time Atlantic writer, author, and now Substacker). Fallows is chronicling the debt ceiling issue in real-time on his Substack (which you can subscribe to for free!). His blogs focus primarily on the way that the political media is covering this manufactured crisis. I specifically like his frame which argues that “the ‘debt limit’ is a serious threat. It's not a serious issue.”
Now, before we begin this episode of Calibrate Your Anxiety, I’d like to caveat that my intent is not to offer any predictions or certainties about the future. This is merely some context that I think may be helpful. You may finish feeling certain. Or you might feel less certain than you did at the start. Sorry! At the end of the day, nobody knows anything and the best we can do is be humble about that! Onward!
You’ve been doing a great real-time series on the debt ceiling — specifically how a kind of both sides media coverage legitimizes the very mechanism of a debt ceiling but also how it frames the issue as some kind of rational politics and not what it really is (reckless, unnecessary political brinkmanship by one of two political parties). But could you summarize a bit why you wrote “there is no rational reason for the U.S. to have a “debt limit?”
JF: For the vast majority of America’s history this (the debt ceiling) wasn’t a thing people thought about. The federal debt limit didn’t exist until World War One and then it was simply adjusted in accord with what Congress had already agreed to spend. Through the early 1990s people knew that there had to be a ritualistic increase in the debt ceiling but it was treated in politics the way it existed in reality. And the reality is that the level of federal debt is the result of decisions congress makes, not the cause. The analogy I use is that it is the check at the end of the meal. You’ve agreed to spend the money on those dishes and then the bill arrives. Until the early 1990s, Congress had to go through the formality of saying, ‘the debt will be this much higher so we’ll increase the limit this much.’ In other words, it was treated as the technicality that it actually is. Newt Gingrich developed the idea in the ‘90s that the debt limit could be held hostage and used as a bargaining tool to get what you wanted.
Ok, so this is a hostage situation. But the reality is that we have a debt ceiling. It seems like all the justifications not to raise it are bullshit, right?
There is no rational reason whatsoever not to raise it. Absolutely zero. There is no reason because what we’re really talking about here is whether the U.S. will honor the expenses it has already committed to. Not raising is reneging on a debt. It’s playing poker and if you lose not paying what you owe.
Yeah, simply talking about it makes me feel like I’m going insane.
Because the idea of not raising the ceiling is so completely without foundation it is actually hard to convey that idea in political writing without sounding crazy. The reason is because it is actually crazy.
I feel like that’s a fundamental dynamic of this era — things proposed by people in power that sound so ridiculous that some media feels uncomfortable discussing it.
A part of your coverage of this issue focuses (rightly, I think?) on the potential risks of defaulting. On Tuesday the Treasury Secretary outlined some catastrophic outcomes, should that happen. Naturally, that’s a scary thing to read about. But you wrote recently that, “Democrats in the House and Senate will eventually get the debt limit raised. But they’ll have to do so by cramming it in as one more item in their already-overstuffed ‘reconciliation’ bill...Doing it that way will be much slower, and more complicated, and with much greater risk of collateral damage.” Can you explain what you mean by collateral damage?
They won’t force the treasury to renege on the debt — that’s too nuclear of an option. And so the damage will come from the uncertainty that comes from playing chicken on raising the limit. As it gets closer to the deadline without a solution the central banks will have to prepare for what might happen, even thought it won’t happen.
I’m trying to think of a real-life analogy here but it’s hard because this type of thing doesn’t really occur naturally. What is happening here is a gratuitous infliction of an uncertainty tax on markets by the GOP.
How worried should people be about this issue? I also realize that might be a sliding scale. If you’re older or retired or heavily invested in the market, you may have more reasons to worry than somebody younger in their career but do you have a way to contextualize how much people should be concerned about this?
So, default aside [meaning that Congress will eventually raise the limit] and just talking about the uncertainty from playing this game of chicken, I’d argue this kind of political economic recklessness is not comparable to any of the large scale economic shocks like, say, the 2008 financial crisis or the financial damage following the 9/11 attacks or the 1980s financial shocks.
But stalling on this could threaten or cause a government shutdown and when people track GDP and hiring trends you can track the effects of government shutdowns and there is a negative effect. They do depress hiring for a bit and have a measurable effect on loans. It’s a punch in the gut for an economy that has other problems it’s dealing with. Certainly for the government there are catch-up costs. The government has no choice right now but to prepare for possible shutdown or possible default even though it won’t happen. And there’s cost to that.
It’s an example of the strain on our public life when one party is not adhering to what is assumed to be the rules of normal behavior. You can see this even in the comments of Mitch McConnell himself. Two or three days ago, in addition to his nonsense about fiscal responsibility, he said that raising the debt limit of course has to happen but that the party will not support it. Think about that. The person who is leading the Republican Party said it’s obvious what needs to be done but won’t do it. Republicans realize it’s a threat they cannot carry out because it’s too destructive but they’ll still posture.
So maybe a way to look at it is that, when it comes to the actual debt limit crisis, there’s not as much that the average person needs to practically worry about. But when it comes to what this whole affair says about our broader political system…it’s indicative of a sickness that we should be quite worried about.
We will survive debt limit crisis and unless you’re a direct government employee, you might not be directly effected. But we’re all the worse for it. There’s accumulated damage from this kind of recklessness with the machinery of government.
One veteran journalist on Twitter — whose news acumen I trust — tweeted to me about this issue:
Is he right? Is that the best way to think about it? Should we just be humble and admit we don’t know anything?
Well, I have great empathy for people whose job it is to report on the congressional maneuvering. The job is hard and, in fact, it’s probably impossible to get the truth from many of these lawmakers. We do know the U.S. treasury won’t default on its debt. At the last minute somebody will flinch because to do so is just too damaging. Now, we don’t know whether there’ll be a government shutdown. These things get pushed together. That we don’t know.
There’s a distinction between recognizing the unknowability and opacity of a situation on the one hand and on the other hand dismissing what is happening as “just politics,” which makes it sound as if it’s just disagreeing. There is no case you can make for playing chicken with the debt limit and yet they’re doing it. We shouldn’t pretend to know what is going on. On the other hand, this shouldn’t be normalized. It’s kids playing with a loaded gun. So I think we should have humbleness about what we know, but let’s not normalize this.
That seems like a fair compromise. I feel a bit out over my skis on issues like this. I think other people feel the same way. They assume this all should make sense and so they pretend to understand it. But there’s a nonsensical quality to it.
In our shared life as reporters there’s this idea that, if you don’t know about something about an issue, then the most comfortable default assumption is that there must be something to each slide. The very complexity of this topic makes us default to that intuition and want to see all sides. But sometimes people are just exploiting that intuition to make the ridiculous seem reasonable. This is one of those times.
A Second Opinion
Because it’s good to hear from people with deep expertise in the field of economics, I also reached out to Drew Westberg, an associate professor of Economics at Coe College with similar questions. Here are his answers.
I feel like the conventional wisdom is that eventually democrats will get the limit raised. That it's basically just a question of how long this takes and whether the uncertainty causes collateral financial damage. Is that a good reading of the situation in your mind?
DW: I would agree with your read, yes.
I feel like we live in an era where once unthinkable/low probability events are happening. Is there an actual chance that we'll default on our debt and cause a massive crisis?
It doesn't seem probable. There are a lot of Republicans invested in US Treasury markets. I'd be very surprised if they let the default happen for more than a few hours before they "swoop in to rescue the American people from the dysfunctional Dems" - at least that's what I would expect McConnell to do.
What happens if we don't raise the debt ceiling?
Well, we don't pay back people/organizations/institutions that sent their money to the State to be destroyed for a future promise to get it all back with interest. It will make some pretty powerful people/orgs pretty pissed. That's going to be a problem. The bigger problem though, comes the next time the Government needs to pump money into the system (which it needs to do all the time). To spend more money into the system, the State will have to find new bond buyers (at much higher interest rates), raise taxes/fees quite a bit, or simply spend a lot less than would be desired simply to ensure the relative scarcity of money.
Failure to raise the debt limit makes it much harder to maintain the value of the US dollar, the reliability of the US Government, and the ability for the US Government to solve collective action problems (which we have a few of right now). Now, if you're a BTC aficionado, this outcome is a gold mine for you (if you don't hold onto it long enough for everyone to realize the US is still one of the safest bets possible). If you're someone interested in Democracy and the Social Contract, this outcome is tragic.1
How worried should normal people be about this issue? I also realize that might be a sliding scale. If you’re older or retired or heavily invested in the market, you may have more reasons to worry than somebody younger in their career but do you have a way to contextualize how much people should be concerned about this?
This one is a little harder for me to really land on an answer. Basically, anyone holding a US Treasury would take a hit if they tried to go and sell their bond. This would hurt corporations, banks, 401ks, municipalities, Universities, etc. It would have widespread reverberations. This will be particularly true in the short-term. If anyone tries to sell those bonds right away, out of fear for example, they will take a serious loss on their investment. The further away we get from the default though, the value of those bonds should move back closer to their pre-default values.
One last thing:
There appears to be some agreement between the people I’ve asked, when it comes to the notion (the journalist Heidi Moore has a similar, accessible take, via Twitter if you’re interested) of the U.S. truly defaulting. But I did want highlight one take from a staffer in the House of Representatives, which argues, there is maybe more risk of a default than people are letting on. I found this point, about the shifting ‘X Date’ of default, to be pretty interesting/concerning.
In conclusion:
You now have a lot of information. Perhaps too much! So, how best to calibrate your worry? I don’t feel comfortable telling you how to feel on this one so I’m just going to speak for myself, having had these conversations. I’m not a government employee potentially facing shutdown and I’m not near retirement and am not looking to cash out of any investments in the short term. As such, I’m personally not that anxious about the possibility of catastrophe, even though the last few years have really shaken my faith that the people in charge have things under control.
Based on these conversations, the risk of true calamity seems low enough that I can focus my worry on more certain anxieties…like responsibly navigating the pandemic and our dying planet…yay! Plus, I’m not in control of raising the ceiling. That said, I’m trying to do a thing where I’m always reserving a little bit of space in my brain for the low probability worst case scenario, if only because it makes me feel a tiny bit in control of my life.
I think all of this points to a bigger worry, which is a totally craven Republican Party that is recklessly playing chicken with our country’s finances for political purposes. This seems to intersect with a broader congressional dysfunction that isn’t limited to Republicans (though, in this case…it is not a both sides issue!) As with most things politics, the long-term view seems very grim and our system of government appears to be constantly crying out for reform. If we (likely) avoid catastrophe, the very fact that this piece needed to be written should probably give you pause. It gives me quite a bit of pause.
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Westberg offered a sidebar to all this that I thought was extremely interesting…but it’s a bit in the weeds so I’m including it as an endnote for the dedicated readers. I may be reading this wrong but I’m putting it in the camp of money is just bonkers:
Our entire collective understanding of debt is just backwards. Two facts lay our misunderstanding of public debt bare for all to see:
You and every individual with incomes in the US pays taxes every year. They pay those taxes in US Dollars.
The US Government is the only entity that can issue/create those dollars.
If these are both true, then logically, we can't pay taxes to the federal government in US Dollars without the US Government spending those dollars into the economy first. How else are we supposed to find those dollars? The US Government is, as Dr. Kelton likes to say, a currency issuer. It alone creates the currency when it spends. It doesn't need its own dollars to come back to it for it to spend new dollars out into the economy. The Government spends first, then taxes back some of that spending later. Notice I said some.
Every time the Government spends, it is using its monetary system to move resources toward its goals (i.e. new roads, more teachers, training public safety officials, etc.). It then requires everyone to pay taxes back to the Government in the Government's own currency. But, it doesn't do this because it needs that money. It can't. It literally already spent that money into the system in the first place. So why tax? Taxes require all of us to go after the same thing. That means we will all do things directly (serve in the Army) or indirectly (open a restaurant) for the State (in a National sense, not an Iowa sense). Taxes ensure demand for the State's currency but requiring all of us to go and get it, and by taking some of that money out of the economy to ensure its not too easy to get Taxes can also be used, as they are now, to encourage some behaviors (e.g. energy efficient appliances) or dis-incentivize behavior (i.e. smoking). But, at its core taxes drive money demand and help to manage the relative scarcity of money.
So, State's spend first but tax later. These actions occur for separate reasons and are not really tied to each other so long as the tax payment system is strong enough (i.e. scary enough that people will pay the tax). But, in a system like that, why would the State tax back all of the money? Imagine how pissed off most people get when the State taxes about 1/3rd of their income. A 100% tax (i.e. a "balanced budget") wouldn't leave any money out in the economy. There wouldn't be any liquidity to promote private activity and, in general, your State probably wouldn't last very long (revolution and all that). So, the State taxes back some of the money it originally spent, but not all of it, leaving the remaining 2/3rds in the private domestic economy for private use and/or accumulation. In doing that, recognize the State has engaged in "deficit spending". But, in that same breath, we have to recognize that the Government's deficit is actually the domestic private sector's surplus!
Now comes the really weird (and frankly dumb) part. What the hell are these bonds for, these Treasuries that accumulate as "debt"? Well, they're nothing more than a different form of savings for people that have already accumulated enough state dollars. How do we know? What do you buy them with? You betcha, US Dollars. Just like those taxes are paid with dollars already spent into the economy, US Treasuries are purchased with US Dollars that have already been spent into the economy. Every time the US Government deficit spends, it is recognizing that it is adding a lot of new spending ($3 T in the case of the US Gov't today). That's a lot of new money going into the economy. Well, if that all gets into the real economy (i.e. into the hands of people that spend it) that's going to make money very easy to get, too easy. So, what can the Government do? It can issue bonds in roughly the same amount as the deficit spend. This lets the Government spend in the areas it wants all while pulling a nearly equivalent sum out of the economy from areas where it wants less spending and more savings.
Thank you for this, Charlie! I finally am able to feel like I have some semblance of a grasp around this subject. Love the idea of making this a more normal feature of the newsletter - always important to acknowledge blind spots and work towards better understanding, and that can be done better in a community like this!
Westberg's endnote seems to implicitly endorse MMM, or Modern Monetary Theory. I'm sure he knows more about economics than I do, but to my awareness MMM has been roundly criticized for discounting the effect of government spending on diluting the value of currency. The endnote states "It can issue bonds in roughly the same amount as the deficit spend. This lets the Government spend in the areas it wants all while pulling a nearly equivalent sum out of the economy from areas where it wants less spending and more savings." Bonds are of course eventually paid back... in USD, eventually increasing the total sum of US Dollars. The explanation of taxes and how dollars are created makes sense, but seems indicate that spending lacks downsides. I don't want to go down the classic libertarian rabbit hole here, but I am curious if reconciling our "debt" is even sensible in these circumstances. Almost seems like "debt" is the wrong word.