DEFAULT DANGERThis Debt Ceiling Showdown Is Especially Risky
On Thursday, 19 January 2022, the federal government hit its $31.4 trillion debt limit. That means that it can’t borrow any additional money to meet its obligations, which include everything from issuing Social Security checks to paying interest on Treasury bonds. Past fights over the borrowing limit didn’t spark a financial crisis. This time could be different, according to two experts.
On Thursday, 19 January 2022, the federal government hit its $31.4 trillion debt limit. That means that it can’t borrow any additional money to meet its obligations, which include everything from issuing Social Security checks to paying interest on Treasury bonds. Treasury Secretary Janet Yellen has said that unless the debt ceiling is raised, the government will default on the national debt in June.
Earlier confrontations over the borrowing limit ended before they could trigger what would be an unprecedented default. In 2011, Congress and the Obama administration hammered out a last-minute deal. Currently, congressional Republicans are demanding spending cuts before raising the debt ceiling. Democrats and the White House say they want a debt ceiling hike with no conditions attached.
Failure to reach a deal would have dire financial consequences. Yet for the moment, investors seem unfazed. For more insights into this dynamic, editor of Stanford Business magazine,spoke with two Stanford Graduate School of Business experts: Neil Malhotra, a professor of political economy who studies American politics and ideological polarization, and Arvind Krishnamurthy, a professor of finance who studies the U.S. Treasury bond market. Both expressed concern that the latest debt ceiling showdown could play out differently than previous ones.
Will the New Speaker Follow the Old Script?
Dave Gilson: How was the 2011 debt ceiling showdown resolved?
Neil Malhotra:If you have a House speaker who wants to resolve the debt ceiling crisis, they can find ways to do it. During the last debt ceiling crisis, then-Speaker John Boehner wanted to lift the debt ceiling. He knew that a lot of his fellow Republicans privately wanted to lift the debt ceiling, but they didn’t want to take a public vote doing so.
Boehner did a very creative thing. He said, “Okay, I want most of my caucus to vote against the debt ceiling, and we’re going to give a few moderate Republican votes to the Democrats to lift it.” But the most important thing he did is that he allowed it to be put on the floor to be voted on.
When the majority party loses a roll call vote, it’s called a “roll” — we often say, “the majority party got rolled.” And rolls are very uncommon, because why would the speaker ever let something on the floor that would cause the majority party to lose? They would just rather not put it on the floor.
