IN “BLAZING SADDLES”, a comedy film directed by Mel Brooks in 1974, a black sheriff, menaced by a white mob, takes himself hostage, pointing a gun at his head and threatening to shoot in order to escape. “Hold it, men,” says one of his moronic antagonists, laying down his own pistol. “He’s not bluffing.” This approximates to what Congress did when it created the debt ceiling, the legal limit on how much money the federal government can borrow. Vested by the constitution with the power of the purse and the authority to borrow on the credit of the United States, Congress arranged for America’s credit rating to be taken hostage, placing itself in the roles of both captor and frantic negotiator, in the hope of stopping itself from spending more money than it said it could.
Unlike Mr Brooks’s sheriff, however, Congress once again looks as if it might be foolish enough to pull the trigger. A two-year suspension of the ceiling is due to expire at the end of July, and partisan brinkmanship over a possible default is again under way. In 2019, the ceiling was set at $22trn, but subsequent borrowing has raised the debt to $28.5trn, and that would become the new limit on August 1st unless Congress raises the ceiling or enacts another suspension.
There is little sign yet of congressional urgency. Having rediscovered the virtue of thrift after the free-spending years under Donald Trump, Mitch McConnell, the Republican minority leader in the Senate, has said he cannot imagine a single Republican voting to raise the limit. Democrats could possibly raise the limit alone, through the process known as reconciliation, but given the complex budget negotiations already under way, wrangling would be protracted and success far from assured.
No other country manages its finances in this strange fashion, with reason. The bickering over the debt ceiling has proved damaging in the past. Ten years ago Standard & Poor’s, a ratings agency, stripped America of its AAA rating, after Mr McConnell used the threat of breaching the limit to extract budget concessions from then-President Barack Obama.
What if the debt ceiling does not budge? Even without congressional intervention, the government would not immediately default on its debt or stop making payments if it hits the ceiling next month. The Treasury projects it will have $450bn on hand at the end of July, and it will continue to be able to borrow to replace maturing debt and to spend new revenue as it comes in. The Treasury would also be able to resort to what are known as “extraordinary measures”, strategies to manage cash and debt, such as withholding revenue that it would normally transfer to government trust funds.
How long these manoeuvres would enable the Treasury to postpone a reckoning, always uncertain, is particularly so now because of the rush of cash in and out of the Treasury during the pandemic. The Congressional Budget Office, which advises Congress on the budget process, estimated on July 21st that all these stratagems would permit the Treasury to finance the government until October or November. But Janet Yellen, the Treasury secretary, has warned Congress that this time the Treasury could exhaust the use of emergency measures far more quickly than in the past—possibly as soon as sometime in August, while Congress is in recess. “I think defaulting on the national debt should be regarded as unthinkable,” she said while testifying to a Senate committee in late June.
This is a predicament Congress created for itself. Until 1917 Congress typically voted to authorise borrowing for specific purposes, such as digging the Panama Canal. But when raising money to finance the American entry into the first world war Congress began setting aggregate limits, while giving the Treasury more authority over how to structure the debt, before setting a single debt ceiling in the late 1930s. Congress has always acted to adjust the debt limit when needed. Since 1960 it has done so 78 times—permanently raising it, temporarily extending it or revising its definition. It did so 49 times under Republican presidents, and 29 times under Democrats. But over the past 30 years, as partisanship intensified and the debt ballooned, the debt limit became a weapon with which the party out of power could force concessions from the president and his congressional allies. The Treasury has had to resort to extraordinary measures several times in recent years, including three times during Mr Trump’s single term.
Because so much of the global financial system relies upon the perception that Treasury debt is risk-free, American politicians largely agree with Ms Yellen and regard the possibility of default as unthinkable. As a result, the periodic crises over the debt ceiling tend to be greeted in Washington with eye-rolls and an expectation that after much posturing Congress will act at the last moment to suspend or raise the limit. But uncertainty over when the extraordinary measures might fail means legislators may miscalculate when that last moment will arrive. And it may also be that America has yet to test the true depths of partisan nihilism.