The debt limit is still a ticking time bomb

Opinion by Jacob J. Lew for CNN Business Perspectives

After weeks of partisan gridlock, Congress is on track to extend the debt ceiling, averting a potential default looming in less than two weeks. But the solution merely moves the new fiscal cliff to December, aligning the deadline with other imminent crises, like a potential government shutdown if a new funding bill is not enacted.

This is no way to manage a great nation. Congress must act quickly to significantly extend or raise the debt ceiling for the long term, so that our nation does not lurch from crisis to crisis. That is the only way for the United States to avoid a catastrophic self-inflicted disaster. If Senate Republicans want to vote against raising the debt ceiling, they should at least get out of the way to let the vote take place.

For nearly 232 years, the United States has made timely payment on its obligations to bond holders, citizens, service providers and others. This enduring commitment is part of what makes US bonds the definition of a risk-free investment and the US dollar the world’s reserve currency.

As bipartisan letters from former Defense and Treasury secretaries make clear, the consequences of a default could be long and severe. While short-term economic disruption might pass, erosion of confidence in the capacity of the United States to manage its affairs responsibly could cause lasting damage to our economic and national security.

Only Congress can authorize borrowing. The debt limit was instituted during World War I, when rising federal spending made it cumbersome for Congress to act to approve each debt offering individually. It is tragic that in decades of partisan battle, the debt limit has evolved from a reform to bolster US financial strength to a toxic tool that threatens that very strength. Congress needs to act to defuse this ticking time bomb.

Raising the debt limit is a shared responsibility that should be a formality, not a perennial political Armageddon. The time for debating fiscal choices is when those decisions are being made, not after the fact when the only choice is to pay our bills or default. The debt ceiling does not authorize any new government spending, and in fact, the vast majority of current borrowing needs is to fund spending decisions made before the current administration took office.

The full consequences of a default are unknowable, but no responsible leader should want to find out by conducting the first experiment. Short-term interest rates could spike, creating higher borrowing costs for our nation and for millions of families and small businesses. Treasury could lose the ability to disburse payments like Social Security benefits or paychecks for armed forces servicemembers. Stock prices could fall, threatening retirement security for older Americans, and market disruptions could lead to widespread job losses and increased risk of recession. Default could also undermine confidence in the US dollar and financial system, from which our nation draws great strength and power, presenting a grave risk at a time of intensifying geopolitical competition.

Every prior Congress has acted in time to avoid learning the full scope of damage that could flow from default, and this Congress should do the same as quickly as possible. Even waiting until the last moment to act is dangerous. Every day that we get closer to hitting the debt ceiling will drive up borrowing costs for taxpayers. And we know from experience that there is also the risk of a credit downgrade, as well as a decline in consumer confidence. The last thing our nation needs as it leads a recovery from the Covid crisis is an artificial source of uncertainty and risk.

And the risk of an accidental default is very real. Congress may want to know precisely the last possible moment to act, but forecasting Treasury’s inflows and outflows is difficult even under the best circumstances. Daily cash needs are always highly variable — but especially challenging in the current environment as we emerge from an economic crisis. Rapidly changing economic conditions make estimating tax receipts tricky, and outflows for Covid response loans and grants can be similarly unpredictable.

The time is long overdue to reform the way we manage the debt limit. With a stopgap measure almost in place to address the urgent need to avert an imminent crisis, Congress should now act as quickly as possible to remove the threat of another manufactured crisis in a few weeks. For more than two centuries, our nation has paid all its bills on time. It would be a tragic mistake to break that record which contributes so much to our economic and national security.

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