Of late, both parties are again locking horns over the debt ceiling. The immediate cause of the clash is that, as the Biden administration is forced to drastically cut government spending because the debt limit has been reached, the Republicans wish to block attempts to raise the limit. On Jan. 19, the Treasury Department began to take special measures to avoid defaulting on its debt, but if Congress is unable to raise the debt ceiling by June 5, the U.S. will default.
The federal debt has reached $31.4 trillion, averaging $94,000 per American. In the 22 years since the turn of the century, U.S. debt has increased by a factor of 4.6 and the debt to gross domestic product ratio has risen from 55% to 124%, which is higher than during World War II. Superficially, the direct causes of U.S. debt growth include war expenditures, tax cuts, economic crisis relief and welfare expenditures, but there are clearly deeper reasons for the frantic ballooning of debt.
The failure of the debt ceiling to contain the mounting debt is due to political infighting and, in an era of polarized partisanship, the debt ceiling has morphed into a bargaining chip for political games; the parties are caught up in forcing each other to make political concessions and undermine each other’s plans, disregarding the interests of the country’s citizens. In 2011, when the U.S. was last facing a debt default, the two parties dragged out compromise to the last possible moment. The delay triggered violent fluctuations in the capital market and Standard & Poor’s downgraded the federal government’s credit rating for the first time. For the parties, the debt ceiling debates are not about solving the problem, but an opportunity for partisan struggle and political performance. As Bridgewater Associates founder Ray Dalio put it, “It’s a farce that works like a bunch of alcoholics who write laws to enforce drinking limits, and when a limit is reached, they do a farcical negotiation that temporarily eliminates the limit which allows them to have the next drinking binge until they reach the next limit.”
U.S.-style democracy lacks fiscal constraint and produces short-sighted policy. According to public choice theory, U.S. debt expansion is the result of incentives for voters and politicians during campaigns and elections. Voters want to minimize taxes and maximize benefits, and politicians win votes by catering to these demands. It is impossible to reduce taxes while increasing spending without borrowing. Whether the Democratic Party or the Republican Party is in power, both are keen to spend money to improve their position on the political scorecard. Over time, expenditures on social benefits have expanded to account for about 70% of federal spending.
It is the monetary hegemony of the dollar that allows the U.S. government to spend, unshackled by temperance. Confident in this dollar hegemony, the U.S. offloads financial burden at will, splurging while other countries foot the bill. Following the global financial crisis of 2008, the Federal Reserve implemented three rounds of large-scale quantitative easing. Excessive issuance created spillover risks throughout the world. After the outbreak of COVID-19, the Federal Reserve again fired up the money-printing presses, announcing zero interest to pave the way for the unhindered printing. The world foots the bill under these U.S. economic stimulus policies. Under the auspices of hegemonic logic, the U.S. has formed a debt-based economic system. The main features of this system are that the government implements a deficit fiscal policy: The citizenry consumes beyond its means, foreign trade deficits accumulate and the government responds by issuing debt.
During the Nixon era, U.S. Secretary of the Treasury John Connally once bragged about offloading onto other countries, “The dollar is our currency, but it is your problem.” However, the reality is that the heavily indebted U.S. cannot completely offload its burden. Huge debts generate high interest rates, which will impose a heavy financial burden. Debt absorbs private savings that could have otherwise been used for investment, resulting in reduced growth. Also, debts damage the credibility of the U.S. government and its dollar, increasing the risk of a fiscal crisis and reducing investor confidence. Once the dollar hegemony crumbles, upon whom will the U.S. offload its burden?
The author is an assistant researcher at the Chinese Academy of Social Sciences’ Institute of American Studies.