Demystifying the Debt Ceiling

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For the past three months, the business press has been sounding the alarm about the “debt ceiling,” which sets the legal limit on how much the US government can borrow. A recent article in the Financial Times, which discussed the possibility of “financial Armageddon” and featured a picture of a mushroom cloud, is indicative of the widespread concern. 

The debt ceiling was first created over a century ago, and since then, Congress has repeatedly increased it to keep up with new government borrowing. For example, it was raised over a dozen times while Ronald Reagan was president, and more recently, it was increased to $22 trillion in 2019 and $31.4 trillion in 2021. Generally, these increases have been routine events. 

But this winter, echoing a similar incident in 2011, Republicans in Congress have been threatening to block further increases in the debt ceiling. Treasury Secretary Janet Yellen has warned that this could lead to “economic and financial collapse.” What’s going on?

A System in Decline

The turmoil in US politics is a reflection of deeper problems. Since the 1970s, the US economy has seen productivity growth stagnate, and this has made it more difficult to generate the ever-increasing profits upon which capitalism is based. 

To help shore up their system and restore profitability, capitalists and their politicians—both Democrats and Republicans—worked to suppress wages and slash corporate tax rates. Paul Volcker, the Carter Administration’s choice to lead the Federal Reserve, summed up the mood at the time by saying that “the standard of living of the average American has to decline.” Attacks on the labor movement stepped up, and corporations moved jobs to countries where people could be paid far less. Rather than rallying the public to fight back and spearheading movements to defend workers’ standard of living, the leadership of most unions instead largely accepted defeat, and rammed through a series of concessionary union contracts. 

As a result, from 1980 to 2014, the income of the richest 0.01% of Americans grew by an astonishing 423%, while average real incomes for the bottom half of adults remained stuck at about $16,000 per year. Faced with weakening economic growth, the ruling class has managed to keep getting richer and richer by redistributing income upward, while imposing stagnation and austerity on the rest of us. The strategy of cutting corporate tax rates, relocating production overseas, and pitting workers against each other in an international game of divide and rule proved to be an effective way to revive corporate profits after the 1970s crisis. 

Rising Profits and Growing Debt

Although successful on its own terms, this attempt to prop up capitalism has created a whole new set of problems. In particular, because of tax cuts on corporations and the wealthy, it has become increasingly necessary for the federal government to borrow in order to finance its operations. 

This shift has been documented in particularly stark terms by the economists Emmanuel Saez and Gabriel Zucman. In a recent book, they show that the average tax rate on profit income in the US has fallen from about a half to a quarter, and billionaires now pay a lower tax rate than the average worker. Meanwhile, just as taxes on corporations and the rich have been slashed, military spending has ramped up; from 2001 to 2021 alone, the Pentagon spent a whopping $14 trillion on war. The combined effect of all this has been a massive increase in federal government debt. 

Recent events have reinforced this trend. The COVID-19 pandemic particularly strained government balance sheets, and despite the Democrats’ posturing, they made no serious effort to tax the rich when they controlled the White House and Congress during 2021 and 2022. Meanwhile, military spending has continued to rise—this year’s “defense” budget is nearly a trillion dollars, and the escalating Ukraine war, which both Democrats and Republicans have largely voted to fund, has already cost tens of billions. 

Financial Armageddon?

As a consequence of all this, the federal government only collects enough tax revenue to finance about 80% of its spending, which means the remaining amount must be borrowed. As a result, in January, federal debt reached the current legal limit of $31.4 trillion. 

In response, Republicans initially said they would not raise the debt ceiling unless Biden agreed to trillions of dollars in spending cuts. One specific proposal put forward by the Republicans would do this by raising the retirement age for Medicare and Social Security to 70, while others have suggested deep cuts to Medicaid and other programs. More recently, House Republicans passed a bill that would increase the debt limit on a short-term basis, but the bill includes poison pills like reduced IRS funding, cuts to green energy subsidies, more stringent requirements for Medicaid eligibility, and an end to the current student debt forgiveness program. The bill is unlikely to pass the Senate, and Biden has vowed to veto it if it ever reaches his desk. 

In the meantime, in order to pay the government’s bills without breaching the debt ceiling, treasury officials have had to resort to “extraordinary measures” like suspending government investments in retirement plans. These maneuvers will buy time, but unless the debt ceiling increases, within a matter of months the government simply will not have enough money to keep up with interest payments, retirement benefits, and other legal obligations. This would mean an unprecedented default by the U.S. government. 

The effects of this could be disastrous. Historically, US federal debt has been widely viewed by investors and central banks as a “safe” way to store wealth (for example by buying Treasury Bonds), because of the assumption that it will yield guaranteed interest payments and maintain a relatively stable value. A default would show that this assumption no longer holds. This would upend the foundations of the global financial system and could be hugely destabilizing. 

The Purpose Served by the Debt Ceiling

Of course, there is a simple way to avoid all this: get rid of the debt ceiling. So why hasn’t that happened? The reason is that, at least for certain sections of the ruling class, the debt ceiling serves an important purpose. 

Opinion surveys have shown that, while most normal people do not attach significant importance to government debt, wealthy people view federal debt reduction as a top priority. They see the massive buildup of debt relative to GDP, and are understandably concerned about what that means for the long-term viability of their system. So they want to reduce that debt by cutting spending on the social programs that benefit the rest of us. 

Although such spending cuts would likely generate massive public opposition, a debt crisis can make it possible to force them through anyway: just ask the people of Ecuador, or Greece, or Jordan, or Ireland. While a full-blown debt crisis in the US is not in the interests of the ruling class, the threat of such a crisis—which is precisely what the debt ceiling is being used to create—can serve the same purpose. In fact, in response to the previous debt-ceiling impasse in 2011, then-president Obama proposed cuts to Social Security which would have normally been unthinkable. This is why a section of ultra-rich Republican donors, and the politicians they helped put in office, are willing to push the federal government to the brink of default. 

Others in the ruling class have expressed opposition to this tactic, while still supporting the goal of cutting social spending. For example, in a statement earlier this year, the US Chamber of Commerce urged House Republicans not to “play chicken with the full faith and credit of the United States,” while at the same time acknowledging a desire to reduce federal debt by means of “overhauls” to social programs. Similarly, Joe Biden has demanded that Republicans raise the debt ceiling, but has long advocated cuts in Social Security. Thus the fight over the debt ceiling largely reflects tactical disagreements within the ruling class about how to implement a shared goal: making regular people live with less, while the rich continue to get richer. 

We Won’t Pay for the Failures of their System!

Capitalism is a dysfunctional system in serious decline. In order to keep it alive, the ruling class must bend the rest of society to its twisted logic. Fundamentally, their political aims reflect this shared objective, even if they disagree with each other about tactics. But for the rest of us—the overwhelming majority of society—there is no reason to continue propping up a failed system. Instead, we need a socialist economy based on public ownership and democratic planning, run for the benefit of all, not the enrichment of a tiny few. 

As long as capitalism does exist, the ruling class will seek to make the rest of us pay for the problems they create. That’s why, in order to conserve cash and stave off a government default, the Biden administration has already started to curtail government investment in federal workers’ retirement plans. As the drama over the debt ceiling drags on, we can expect more such maneuvers. We need to organize and fight back, being ready to defend key programs like Social Security with mass action in our workplaces and in the streets if necessary.

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