Game of Chicken: Congress, President and the Debt Ceiling

Already in January of this year, the USA exceeded their self-imposed debt limit of 31.4 trillion US dollars. Only through some tricks of the Treasury Department, the USA is still able to service their debts at least until June. If Congress does not increase the debt limit by then, the USA faces significant economic problems. The fronts in Washington D.C. are hardened. The Republicans demand drastic spending cuts and cost savings, primarily affecting prominent social security programs such as Social Security, in exchange for their approval to increase the debt limit. President Biden doesn't want to negotiate, stating that Congress must approve the increase because it concerns the repayment of debts and the financing of expenses that Congress has already approved. The USA is already in the early phase of the presidential campaign, and here, attempts are being made to find political culprits to gain political capital in the election. Not the best context for a fundamental solution to the problem.


But what is this actually about? The debt limit was created by Congress in 1917 to control how much debt the government can take on to service loans and cover government costs. Since the US government has had an annual budget deficit of around one trillion US dollars since 2001, this must be covered by borrowing. The debt limit needs to be increased when the government needs to take on additional money to service existing loans. Historically, such an increase has been routine in the USA. Since 1960, this has already happened over 78 times, regardless of political majorities in Congress and which party held the presidency. The problem only arose under President Obama in 2011 when Republicans in Congress refused to approve the increase in the debt limit for the first time. It wasn't until two days before the deadline that Congress reached an agreement. With growing party-political polarization, the debt limit increasingly became a political football.


And what would happen if the USA were no longer able to service their debts? Economists argue about this. But it seems clear that the international financial markets would come under pressure, and the USA might not be able to guarantee their spending on military and central social security programs. Instability and chaos would be the result. Millions of jobs could be lost. In addition, the creditworthiness of the USA on the international financial markets would suffer. The dollar as a global reserve currency could be questioned. Memories of the global financial crisis of 2007 come to mind.


No wonder that voices from the executive branch are increasingly calling for the debt limit to be abolished altogether. Apart from the USA, only Denmark and Australia have similar instruments for controlling the debt limit. Some economists see the debt limit as a useful tool for controlling the indebtedness and spending policies of the executive through the legislature. Other economists argue that Congress already has a prominent role in passing the budget and can intervene here. However, the majority of economists and politicians see the debt limit as a curse for sound fiscal policy, making it impossible for the government to make the spending it has already committed to. In the current context of extreme party-political polarization, it seems almost impossible for the two political parties to agree on a common path. And so this game of chicken is likely to be played frequently.

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