Thank goodness, the debt ceiling debacle is over with the passing of the Fiscal Responsibility Act of 2023. We appreciate the delegates who worked toward compromise to avert this crisis.
A shout-out to military personnel loyalist Republican U.S. Rep. Doug Lamborn of the 5th Congressional District who voted “yes.” And House Speaker Kevin McCarthy, who brought GOP members to the table to broker the compromise with President Joe Biden, despite much pressure from those on the far right.
Default on U.S. debt would have been calamitous for Americans and global economies would have been thrown into chaos. Think interest rates are high now? Mortgage rates, credit card rates, car loan rates would have all reached the stratosphere.
Goldman Sachs economists estimated a breach of the debt ceiling would have immediately halted one-tenth of U.S. economic activity. According to think tank Third Way, default would have cost 3 million jobs and added $130,000 to a 30-year mortgage. Who could financially survive that gut-punch? Higher interest rates would have increased the debt by $850 billion.
If high prices are a concern now – and a political issue – default would have meant everything becoming exorbitantly expensive. We’ve been talking and reading and writing about the tipping point of a recession. Default would have been that point.
It was all too scary close. Not only in the U.S., but in our standing vis-a-vis with China.
Our country would have been more vulnerable to both Russia and China. That Chinese warship cut in front of a U.S. warship in the Taiwan Strait, which China sees as its own. We’re already in a delicate situation there. A strained U.S. economy, a slump in stock and bond markets, and an eroded financial standing in the world would not have signaled strong defenses. Already, China and Japan are the largest foreign investors in American government debt. Together, they own $2 trillion – more than a quarter – of the $7.6 trillion in treasury securities held by foreign countries. Between 2000 and 2022, China’s ownership alone grew to $855 billion.
Those government bonds help finance federal budget deficits. But with foreign ownership, it’s tricky. How would China have handled a default with our current fragile relations? Had that debt limit bill not passed, the U.S. – our economy and our armed forces – would have been exposed.
Any hit to confidence in the U.S. economy, whether from default or the global community reacting to it, could have caused investors to sell off U.S. treasury bonds and weaken the dollar. As it was, uncertainty rattled the stock market.
No more politicians holding the U.S. economy hostage. Instead, they need to shore up U.S. finances by generating revenue in two ways: taxing ultra-wealthy Americans – without workarounds – who continually dodge, and closing corporate loopholes.
Otherwise, the federal government will keep borrowing to meet legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds and other payments.
Without a drive for needed revenue, we’ll find ourselves in the same situation down the road.
The analogy, though, that running a government should be like running a business is weak. The U.S. government is not in the business to make a profit. Take the U.S. Postal Service. It’s not cost effective for mail carriers to drive rural roads six days a week to deliver mail. But Americans expect delivery, especially to housebound residents. Postal service is just that. Service.
Yes, there’s room for the government to cut expenses. Maybe delivery decreases to two or three times a week. But this is a large consideration with impacts to our entire economic engine.
Again, we need more revenue. Or the national debt will continue to rise.
If anything, this legislation buys time until January 1, 2025, to get finances in order. Let’s never again come so close to losing so much.