Investors are convinced that Congress, after provoking a bruising
government shutdown in 2013, doesn’t have the appetite for a
confrontation over the debt limit, especially in an election year.
By Mark Trumbull
WASHINGTON — The U.S. Treasury is just days away from being unable to
borrow any more to pay federal bills, and the stock market isn’t
The good news: So far, at least, those two things don’t have anything
to do with one another.
Whatever else investors are worried about — sending stock indexes
reeling Monday — it’s not fear that the U.S. will default on its
national debt or be unable to make good on other obligations.
It’s not that the nation’s debt limit is unimportant for the wider
economy. Rather, it’s that investors believe Congress will raise the
debt ceiling without the kind of brinkmanship and uncertainty that
dogged the issue since Republicans took control of the House of
Representatives in 2011.
The widespread assumption: Republicans were burned after provoking a
partial government shutdown in 2013 and, in an election year, they
don’t want to risk being burned again.
If that assumption comes into question in coming days, the debt limit
will certainly join Wall Street’s worry list.
Treasury Secretary Jacob Lew warned bluntly on Monday that after Feb.
7, when a temporary suspension of the debt limit ends, the government
will be able to use various gimmicks for “only a brief span of time”
to keep paying all bills, a span that will probably last essentially
until the end of the month.
“Without borrowing authority, at some point very soon, it would not be
possible to meet all of the obligations of the federal government,” he
said, in an appearance at the Bipartisan Policy Center in Washington.
That would obviously be a problem for the government and its
creditors. But it’s also a problem for the whole world economy,
because any shaking of confidence in Treasury bonds ripples quickly
through other financial assets.
For now, the turbulence in the stock market reflects debate about how
strong the U.S. economy’s recovery is (a manufacturing sector report
on Monday looked weak) and how bad a slowdown in emerging-market
nations, driven by tighter financial conditions, will be.
On the debt limit, Secretary Lew echoed the optimistic view that many
political analysts share. Even as he warned of the risks — “Time is
short,” he said — he responded to a question from the audience by
saying that to approach the brink of a default on U.S. obligations is
“not acceptable to the leadership on either side, which is why I’m
confident [the issue] will be addressed.”
Many finance experts say it would be more rational if Congress
addressed questions of borrowing, along with spending and taxing, as
part of a regular budget process.
Instead, what’s evolved is a system in which lawmakers pass spending
bills in excess of tax revenue at one time and then confront the need
to borrow money separately, when they periodically confront a
self-imposed borrowing limit on total public debt.
Both liberal and conservative finance experts say that simply refusing
to raise the debt ceiling is not an option. If the goal is to restrain
the growth of debt, then the right answer is the change spending or
tax policy on the front end.
To not raise the debt limit would amount to refusing to pay bills that
are already coming due — from federal salaries to Medicaid payments or
money due to federal contractors. Although both parties have used
debt-limit deadlines as leverage for negotiations over fiscal matters
in the past, this is why it’s hard to sustain a strategy of
brinkmanship on this issue — as Republicans found out the hard way
A game of “chicken” holds suspense only if there’s some real
uncertainty about which side will ultimately back down, said Paul
Sheard, chief global economist at Standard & Poor’s Rating Services,
at a debt-limit panel discussion Monday following Lew’s remarks.
After its Tea Party wing mounted an insurgency last year, seeking
concessions from President Obama on health-care policy and seeking to
use the budget or the debt limit as leverage, the Republican Party
ultimately had to back down.
The bruising loss hasn’t left an appetite for another epic battle over
the issue. Add the fact that it’s an election year, and it explains
why no one seems very worried about an impasse this time around.
Still, a drama needs to play out somehow in coming days or weeks, with
both sides seeking a public-relations edge on fiscal matters.
And somehow, one of these years, America will have to wrestle more
seriously with how to curb the long-term rise of its public debt.
Lew, for his part, said current trends of decline in budget deficits
(as a share of the national economy) give Congress at least some
breathing room before that becomes a crisis.