Deep Dive: Debt ceiling solutions

In some of our call scripts, we’ve asked you to tell President Biden to end the Republicans’ debt ceiling hostage-taking once and for all.

Since then, President Biden and Speaker McCarthy have hammered out a possible deal, but passage is far from certain—the House, with its MAGA caucus, might not have the votes. If it does pass the House, it will then need to circumvent a possible Republican filibuster in the Senate and pass with the slim Democratic Senate majority. If the Senate makes changes, Congress will convene a conference committee to merge the two versions into one bill for final passage.

If the Biden-McCarthy deal passes, and the President signs it, the crisis will be over… for now. But as long as the debt ceiling exists and Republicans keep using it to hold the country hostage, we will be back in this situation again and again.

Let’s take a look at the problem, and what each of the options for averting default entails.

The debt ceiling problem in a nutshell

Part 1: The federal debt and deficit

The US government spends money on domestic programs and services, foreign aid, the military, service on the government’s debts, etc. It sources this money from tax revenues and from the issuance of debt—namely, Treasury notes and bonds, which investors purchase (thus providing the government with revenue) expecting the government to pay back the principal with interest (the aforementioned debt service).

Most of the income or wealth available to be taxed is held by rich people and corporations. Republicans have been cutting their taxes for decades, leaving them no longer paying their fair share, in an insatiable ideological pursuit at the direct expense of the services that the government would provide to all of us with that money. Cutting taxes, and thereby revenues, is how Republicans have helped to create such a large federal deficit: the amount by which government outlays are greater than revenues.

(The Republicans are well aware of the effects of their policy; it’s a strategy called the Two Santa Clauses that dates back to the 1970s, devised to con voters into thinking Republicans weren’t the destroyers of economic prosperity that they demonstrably are.)

Deficit spending coupled with responsible taxation is necessary to a thriving economy: the spending is the government investing in the country, creating economic growth, from which taxation of rich people and corporations recoups returns. Republicans upset the balance when they fail to tax rich people and corporations properly, so any economic growth does not come back to the government as revenue it can re-invest; and when they destroy investments in people, infrastructure, education, and so forth, causing the economy to wither rather than grow.

With neither responsible taxation nor sufficient investment, the other option is issuing debt to cover the shortfall from insufficient tax revenue at the cost of taking on more debt service obligations. Of course, that then requires raising more money, either from taxes or from debt issuance.

Part 2: Republican hostage-taking

Republicans have long professed an opposition to “taxing and spending.” With tax revenue slashed to the point of needing debt to supplement it, their other white whale is the programs and services that everyday Americans rely on. And so, starting in 1995, they weaponized a law from a century ago that set a limit on the total amount of debt issued by the government.

The debt limit, or debt ceiling, is a limit on the gross federal debt, which consists of—among other debts—the total face value of securities sold by the Department of the Treasury. Treasury securities are (normally, but we’ll get to that) low-interest notes and bonds, typically regarded as the safest but lowest-earning investment instruments. Other instruments, such as stocks, have higher returns with higher risks; investment portfolios often have a mix of higher-earning investments (to guard against inflation) and safer investments (to guard against downturns).

What we ought to do is restore taxation of rich people and corporations to the levels of the 1950s–1980s, so we can restore the revenues that would fund essential and beneficial programs and services and re-create the economic growth and living standards we had in that period. The government would remain solvent, the economy would flourish, and the people would thrive.

Instead, Republicans for decades now have been using the debt limit to create hostage situations to force cuts to those programs and services. If we don’t raise the debt limit in time, then the government cannot issue more debt (which is to say, borrow money) to cover its existing expenses (including service of existing debt).

If the government fails to pay investors what they’re owed on their Treasuries, that’s called default. Default also includes the failure to pay the government’s other obligations, which can include Social Security checks, veterans’ benefits, and more.

Since that would be extremely bad, this has been an effective tactic for extracting concessions—both tax cuts and service cuts—from Democrats. For most of that time, both Republicans and Democrats have made concessions; particularly, the agreement has always included increasing the debt limit, relieving the immediate crisis but leaving it in place to happen again in a few months or years.

Part 3: The MAGA cult tries to force a default

This year, the Republicans, with an intransigent MAGA caucus that doesn’t actually want to keep government functioning and with government services having already been slashed to the point of chronic underfunding over decades, had trouble agreeing on what to cut. All of the options are things people rely on; cutting them will harm everyday people, not to mention potentially come back to haunt Republicans at the ballot box. Speaker McCarthy’s job is to represent the Republican caucus in negotiations with the White House, but his caucus is too fractured between establishment Republicans like McCarthy who are ideologically committed to cutting something but can’t agree on what, and MAGA Republicans who don’t actually want a solution.

The MAGA Republicans have no policy, only the ideology of Oppose The Democrats On Everything. We want the government to do things for people; they want the government to do nothing. We want the country to function; they want it to collapse. We want the government to continue operating; they want to shut it down. That was how we got the Party of “No” during Trump’s time in the White House, and they’re still throwing the same tantrum today.

The other side doesn’t want to extract concessions like their predecessors did—which means there can now be no negotiation. We have to stop doing this.

But in the meantime, default is approaching fast: Secretary Yellen’s most recent estimate is Monday, June 5. The two sides have reached a deal, but passage is not guaranteed. If it falls through, we’ll need to at least buy time for a more permanent solution. Most of these are things the president can do, as we’ve been urging, though there are a couple of options available to a willing Congress.

The possible solutions

Option #1: Negotiate a deal

This is what President Biden has been doing, as past Democratic presidents and Democratic caucuses have done. Trading offered concessions in both directions, the two parties seek a compromise that raises the debt limit by however much is needed, makes some cuts where they can be afforded, and preserves services wherever possible.

Democrats have participated in good faith in this process for decades—even since 1995, when Republicans first started holding the country hostage by threatening not to raise the debt ceiling. For nearly 30 years, Republicans have threatened to throw the country into default in order to force deep cuts that harm everyday Americans and that they could never pass through the normal legislative process, even as they also have forced further reductions in the tax revenue recovered from rich people and large corporations. And for nearly 30 years, they have achieved one batch of cuts after another.

There just isn’t much left to cut. The federal government’s programs and services are things people need, from transportation facilitation such as our highway system and air traffic control, to income assistance like Social Security and food assistance like SNAP and TANF, to services for our veterans such as VA healthcare. The cuts have been mounting for decades, with every round of cuts making poor people poorer and rich people richer.

The Republicans could help end the crisis without harming Americans in these ways:

Repealing the Trump tax cuts and various other Republican tax breaks for the wealthy and corporations would restore revenues enough to significantly reduce the deficit that they claim to be concerned about and properly fund the reinvestment of those revenues in the country.
They could also agree to a clean debt limit increase without adding yet another round of cuts. And then negotiate and enact spending cuts and tax increases through the normal budgeting process.

Instead, the Republicans would rather take food out of the mouths of children, as the proposed cuts to food assistance would do.

The other problem, as we mentioned above, is that MAGA Republicans don’t actually want a deal. They don’t want anything, nor do they care about any consequences; the only thing they want is to say “no.”

Likelihood of working: It depends on the deal, and whether the compromises involved don’t cost so much support from either side as to sink it. Given the alternative of default, however, we’ll give this better than even odds, now that a tentative deal exists.

They’re running out of time; Secretary of the Treasury Janet Yellen has said that, even with “extraordinary measures,” we’ll likely hit the debt limit in early June, with the most recent estimate being Monday, June 5.

Longevity of solution: Until the next time the country gets close to whatever they raise it to. Any agreement that doesn’t repeal the debt limit, or otherwise put an end to Republican hostage-taking, just kicks the can down the road.

Option #2: Reinstate the Gephardt rule

We mentioned 1995 above. Prior to then, the House had what was called the Gephardt rule, named for Democratic Rep. Dick Gephardt.

Gephardt’s solution was simple: a parliamentary rule that whenever a budget is passed, the debt limit is increased accordingly. No hostage-taking, no frantic negotiations. Just getting on with the people’s business—exactly what Democrats are good at.

And yes, Democrats have had control of the House multiple times since then, including from 2018 to 2021, yet did not reinstate the Gephardt rule. While we asked our Members of Congress repeatedly during that period to solve the debt ceiling problem while they had the majority, it appears we’ll have to wait until the next House Democratic majority. It is important to press our Representatives on this option—they must use their power, the next time they have it, to prevent future Republican hostage-taking debacles.

Likelihood of working: It would take a majority of the House to change the rule, so in this Congress, not very high. Yet another reason to try to flip the House back to Democratic control next year.

Longevity of solution: Since rules can be changed by a majority of the House, it would basically last until the Republicans were back in control, unless they ever stop trying to rule unilaterally and start trying to govern collaboratively.

Option #3: Offer higher-yield premium Treasury bonds

This one’s a bit of a gamble. The debt limit includes the total face value of securities (such as bonds) sold by Treasury—the amount of money borrowed by selling them, not the amount owed in total interest.

So the premium bond idea is to temporarily offer Treasury securities with a much higher interest rate than normal. This would trigger a buying frenzy from investors seeking to lock in those higher rates for the terms of those notes and bonds. The influx of cash from those purchases would briefly put off the government’s need to issue further securities and hit the debt limit… up until it’s time to pay the significantly higher interest on those securities.

Likelihood of working: It would buy us some time. How much, we don’t have estimates for, but if the choice is between “certain default now” and “maybe default later”, we’ll take the latter.

Longevity of solution: Very little. It’s a band-aid. It doesn’t resolve the negotiation, it doesn’t unblock Congress, it doesn’t get the debt limit raised—all it does is buy time for the House to get serious and for the two parties to strike a deal.

The other downside is that a higher interest rate means a higher debt burden. The sale would increase the amount of money the government needs to raise—by whatever means—to cover the debt service.

Option #4: Offer perpetual bonds

A similar idea, floated by New York Times economic columnist Paul Krugman, would be to issue perpetual bonds.

The bonds currently sold by Treasury have a principal amount (par value) and a definite term. When the term ends, the bond has matured, and Treasury pays back the principal to the bondholder. Perpetual bonds have no par value and an indefinite term—there is no principal to be paid and no maturity date at which to pay it.

For buyers, the sales pitch for perpetual bonds is that the bonds pay interest indefinitely, unlike existing bonds which mature at a certain date.

For the government, perpetual bonds bring in revenue (from sales of the bonds) without moving the government closer to the debt limit: since it’s the sum of all Treasury securities’ par value that counts against the debt limit, Treasuries with no par value don’t. The tradeoff is that we would be on the hook for those interest payments into the indefinite future.

Some perpetual bonds can be “called” by the issuer after some minimum term, ending the series of interest payments on those bonds. That would help preserve the assurance that existing bonds provide of a certain minimum payout to the buyer, as well as provide a means for Treasury to not have to pay out interest on them forever.

Treasury would have to balance calling these bonds in order to keep interest obligations from piling up, against the need for the bonds to be attractive to investors—bonds that only yield interest but don’t pay back principal would be unprofitable for buyers if called too eagerly.

Likelihood of working: Much the same as for premium bonds. They’d bring in revenue without bringing us closer to the debt limit, buying us time.

Longevity of solution: Much the same as for premium bonds. This is another band-aid that creates breathing room but doesn’t permanently end the crisis.

Option #5: Mint the coin

31 USC §5112(k) authorizes the Secretary of the Treasury to:

… mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.

So the trillion-dollar coin idea is for President Biden to direct Secretary Yellen to order the US Mint to mint one (1) platinum coin, in the denomination of one trillion dollars, and then deposit it in the US government’s holdings with the Federal Reserve. Then, the government has enough money to continue writing checks for a bit.

Likelihood of working: It’s not without risks (literally creating a trillion dollars all at once carries risks of actual inflation), but as far as we can tell, it would indeed address the current crisis. With the government having enough money in (literal) cash on hand for a bit, we could take a breather on having to issue debt to cover expenses.

Longevity of solution: Hard to say. President Biden’s 2022 budget forecasted a $1.4 trillion deficit for 2023, so, we think we can hope for a few months. But we’re not federal budgeting experts.

Ultimately, it’s another temporary solution. The trillion dollars so raised would run out eventually, and the debt limit would still exist (hopefully increased by then), so we will be back in this situation again, needing to either mint another coin or do something else.

Option #6: Abolish the debt ceiling

This one, only Congress can do. It’s a law; Congress can repeal it. Congress made this mess and Congress can clean it up.

Likelihood of working: In one sense, certain. No debt ceiling, no debt ceiling crisis. The Republicans can’t use the debt ceiling to threaten to throw the country into default if there isn’t a debt ceiling. Having one as we currently do is weird: No other nation in the world has a debt ceiling anything like ours.

But, of course, the Republicans control the House right now. The hostage-takers will not voluntarily release the hostages, especially not if a significant number of them want default.

Best we could do is abolish it the next time Democrats control the whole Congress.

Longevity of solution: Well, the fact that anything Congress can do, Congress can undo cuts both ways. But we can hope that if Democrats repeal the debt ceiling when they can, then they can hold off attempts to put it back—either through Democratic majorities in one or both houses refusing to pass it, or through Democratic presidents vetoing it.

Option #7 and #8: Stand on the Constitution

There are actually two slightly different solutions here, as pulled apart by Vox back in 2021.

Here’s the first one, as described in that Vox piece:

[University of Florida law professors] Buchanan and Dorf note that Congress, by setting spending and tax policy as well as a debt limit, has given the president three mandates: to spend the amount Congress authorizes; to tax the amount Congress authorizes; and to issue as much debt as Congress authorizes. When the debt ceiling is breached, it becomes impossible for the president to obey all three of these legal requirements.
Prioritizing spending on certain activities and cutting it elsewhere usurps Congress’s spending power, by cutting spending unilaterally. Raising taxes without congressional authority would usurp Congress’s taxing power. And ignoring the debt ceiling would usurp Congress’s power to set debt limits.
The last option — respecting Congress’s taxing and spending powers while ignoring its debt limit — is the “least unconstitutional” option, Buchanan and Dorf argue.

The other option is to invoke the 14th Amendment directly, and declare that Treasury will ignore the debt limit on the grounds that it violates the clause that says “The validity of the public debt of the United States, authorized by law, … shall not be questioned.”

These often get conflated because it’s arguably a distinction without a difference—either way, Treasury continues issuing debt in excess of the statutory limit, on the grounds that there is no other option except default.

Likelihood of working: Certain. As long as Treasury continues to sell securities, it continues to raise money for all of the government’s obligations, including both Congressionally-mandated spending and existing debt service.

Longevity of solution: Potentially permanent. The biggest risk would be that the courts (particularly SCOTUS) could order the Administration to obey the debt limit—but first someone would need to sue Treasury and successfully convince the court that they have standing, that they were somehow harmed by the government selling securities to cover its expenses. And then they would need to successfully argue that the debt limit is somehow Constitutional, in spite of the plain text of the 14th Amendment.

If the suit doesn’t happen, or the government wins, then debt ceiling hostage-taking is ended forever. There is no more ceiling, even with the law technically still on the books. The Constitution outranks the statute, and the Constitution commands the government not to default.

Tell our MoCs and President Biden to end the crisis

Right now, there’s a bill. It’s got a ton of compromises, but that’s to be expected when power is divided between us and hostage-takers. It’s the best option in the immediate term to prevent a default. Tell your Members of Congress to pass it, and President Biden to sign it.

And in the longer term, the president and our Congressional delegation must put a stop to the Republicans’ hostage-taking tactics:

We’ve got to stop going through this and start rebuilding the government and our country from decades of Republican austerity.

Deep DiveAnna KrasnerMay 30, 2023Debt Ceiling