The Debt Fight Is Under Control Until It Isn’t
At least for the moment, the U.S. Senate has averted a crisis over the federal debt ceiling, after some Republicans in the chamber grudgingly agreed yesterday to help Democrats put off a reckoning until December. That the United States has endured confrontation after confrontation in Congress over the issue—and will almost certainly do so again mere weeks from now—is, as many other commentators have noted, utterly absurd. If you were in the prime of your life; had a good, stable job; and needed money to make your beautiful, old house safe and comfortable, wouldn’t you take out a loan—and especially so if you found out lenders were rushing to give you money at just about 0 percent interest?
The U.S is not a homeowner, but it can well afford to borrow, and failure to raise the congressionally created debt ceiling is tantamount to saying the U.S. will not make good on payments it has already promised to make. This completely unnecessary bankruptcy crisis perpetually looms on the horizon—not because the country can’t pay its bills but because enough powerful people won’t let it. In the past, similar mistakes have led to catastrophe.
As a historian of the French Revolution, I cannot help but think of the impending state bankruptcy that pushed France into crisis in the late 1780s. In terms of “economic fundamentals,” prerevolutionary France was in good shape: It had Europe’s biggest population, thriving agricultural and manufacturing sectors, and an effective tax rate well below that of Great Britain. Nonetheless, decades of conflict over the size and purpose of its central government meant that disputes over budget deficits and national debt dominated French public debate. For years, the monarchy had endeavored to tax the super-wealthy; in response, many aristocrats, traditionally exempt from paying the head tax levied on commoners, decried those efforts as tyranny. Claiming to speak for France as a whole, members of a tiny and extremely privileged elite stymied all plans to tax their wealth—and did so in a way that rallied public opinion to their cause. Who else would defend the rights of the French nation against the encroachments and greed of expanding Big Government?
Norman noblemen and Paris magistrates were, we could say, the Koch Brothers of their day: bent on conserving their own position by fueling grassroots populism. Their successful depiction of the monarchy’s budget crisis as a result of its own opulence—even today, don’t we imagine that France’s money was spent on Marie Antoinette’s dresses and cakes?—made state finances into a moral, rather than political, issue. Like so many in the United States today, these critics of the centralizing monarchy couched political arguments in what looked like financial or budgetary terms. None of these self-interested aristocrats intended to start a revolution. But by blocking needed tax reform, they provoked a political showdown that eventually turned the summer of 1789 into a social, cultural, and economic crisis of unparalleled proportions.
Of course, 18th-century France differs from 21st-century America in countless ways. The United States has developed a host of mechanisms—including the creation of the Federal Reserve system and the rule exempting basic budget bills from filibuster—to stabilize the economy and protect the functioning of government. But these mechanisms work only if officials consciously activate them.
Of late, the opposite seems to be happening, with Republicans in particular turning formerly routine administrative actions into opportunities to seek partisan favor. (The GOP effort to avoid certifying the outcome of the presidential election is another such example.) These developments are threatening not just democracy but the procedural guardrails meant to protect it. Virtually everyone, including the millions who have tuned out the debt-ceiling issue as “just politics,” assumes disaster will be averted in the end. This assumption in fact increases the danger. A crisis is only under control until it isn’t, and Americans should all be wary of political actors who believe that averting the worst is somebody else’s job.
In truth, the federal government’s financial situation is far better than that of the fictional homeowner who can borrow for nothing. The U.S. is not a human being with a finite life span who needs to save for retirement; it is a nation whose Constitution vows to establish justice and promote the general welfare. As long as the nation holds together politically and keeps up with scheduled payments, big institutional investors are more than happy to lend it money.
The debt ceiling is a relic of America’s first venture into mass-marketed debt, the Liberty Bond campaign of 1917–18. With the costs of World War I far exceeding those of previous conflicts and Progressives’ proposals for new taxes stalled in Congress, the U.S. turned to hawking bonds (as Britain, France, and Germany had already successfully done). Setting a limit on the total value to be sold created scarcity, hence stimulating interest. Advertised in magazines, sold through women’s clubs and the Boy Scouts, and available for purchase in cinemas and department stores, Liberty Bonds were central to the process of selling the war to ordinary Americans. (Remember that the Socialist Party leader Eugene Debs was jailed for speaking against it.) Liberty Bonds helped pay for the war but, even more crucially, they measured and produced popular support for it. Greater government debt revealed growing national prosperity—who knew so many bonds could be sold so quickly?—which in turn equaled greater patriotism.
Over the past century, Congress has repeatedly raised the nation’s credit limit. In 2019, lawmakers suspended the issue for two years; yesterday, Republicans agreed to a stopgap extension. The potential economic consequences of more grandstanding a month and a half from now are grave; default would immediately cut off Social Security benefits, salaries to federal workers, payments to Medicare providers, and much more. Because, as the legal scholar and Harvard professor Chris Desan likes to say, money is one of the key institutions through which polities constitute themselves, repeated political posturing around the debt ceiling has also revealed a real constitutional crisis—one just as serious as that posed by voter suppression or the reconfiguration of the three branches of government along almost purely sectarian lines. Article I, Section 8 of the Constitution gives Congress the power to “borrow Money on the credit of the United States,” but congressional Republicans keep refusing to use this superpower.
That the United States today faces no economic or financial impediments to further borrowing, only politico-legal ones, may come as some relief, but it also speaks to the country’s growing capacity for self-inflicted economic trauma. Its reputation has already been badly tarnished by erratic foreign policy, the lack of a national response to the coronavirus pandemic, and ongoing civil-rights crises too numerous to list. Missing payments in early December, even if measures were found to make them up later, would prompt a further downgrade of U.S. credibility. Restoring it would not be easy. Unfortunately, the attraction of political posturing and line-drawing is again as great as it was in 1789—or, thanks to the vastly expanded media ecosystem and attention economy, possibly even greater.
Karl Marx argued that revolutions must borrow their poetry from the future because they bring about a world not yet in existence. Strange to say, money too gets its value from the future—from what you can do with money tomorrow, next month, next year. This is what makes money a “store of value” and also what makes extended hyperinflation such a terrifying possibility. Whatever its physical form (be it coin, paper, lump of metal, computer code, or cowrie shell), money is valuable only if somebody else will accept it. Right now, pretty much everybody is willing to accept American dollars, and U.S. Treasury bills are still considered—like Liberty Bonds in their day—to be the safest possible investment. If the U.S. were actually to default, this might well no longer be true.
Money and monetary systems are always changing, even when they do so in the name of creating stability once and for all. The move of the United States to the gold standard in 1900 did not prevent the crisis of 1907, the creation of the Federal Reserve did not prevent the bank failures of the Great Depression, and the postwar international monetary agreement known as Bretton Woods (with the U.S. dollar defined in terms of gold and other currencies pegged to the dollar) could not withstand the pressures of globalization and the unprecedented scale of global economic growth after 1945.
Like political ones, monetary institutions are works in progress; value, like democracy, is something constantly under construction. But at least the basic conceit of democracy—that people elect leaders to act in their name and for their benefit—allows for the possibility of change. In agreeing to a postponement, Senate Minority Leader Mitch McConnell has set the stage for yet another version of this constitutional crisis and yet more disruptions to the business of actually governing. But there’s a better solution: Abolish the debt ceiling once and for all.