Same Story, Different Chapter: America Approaches the Debt Ceiling

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It might not be totally fair to call the looming U.S. budget problem the “elephant in the room,” but some iteration of the idiom seems appropriate. It’s not that policymakers don’t want to discuss the problem — it’s just that recent history suggests they are incapable of being productive when they sit down to negotiate.

The U.S. Treasury issued some updated comments about the federal deficit with the release of its fiscal third-quarter refunding statement. On May 17, because the federal borrowing limit had been hit once again, the Treasury began financing the government through extraordinary temporary measures. These measures were enacted to give Congress enough time to reach a deal that would balance the budget, and that time is running out.

“There are a number of factors including a strengthening economy and the impact of sequestration on the timing of outlays, together with the normal challenges of forecasting the payments and receipts of the U.S. government months into the future, that make it impossible to provide a precise estimate at this time on the duration of extraordinary measures,” the Treasury said in its fiscal third-quarter refunding statement.

“Based on current projections of cash flows and extraordinary measures,” Treasury continued, “it appears Treasury will have room to continue financing government operations so that Congress can address this when they return after Labor Day.”

For some context on what the American debt problem looks like right now, here is a chart showing total public debt and debt as a share of gross domestic product. At a glance, the chart evokes a sort of reactionary “we’re screwed” reflex, but while the situation is bad, it is not apocalyptic. Public debt around 100 percent of GDP is enormous but manageable for an economy as productive as the U.S.

What’s more, public spending has skyrocketed over the past 13 or so years because of the wars in the Middle East and post-crisis stimulus spending. While there is a lot to unpack about these events — and a lot that is disagreeable — there is evidence to suggest that deficit spending immediately following the recession helped stabilize the economy.

Source: Data from the Economic Research Division of the Federal Reserve Bank of St. Louis

Source: Data from the Economic Research Division of the Federal Reserve Bank of St. Louis

But to their credit, policymakers are at least not sitting idly by. President Barack Obama has reportedly been meeting regularly with the so-called Diner’s Club, a group of eight Republican lawmakers the White House hopes to engage in budget talks. This group includes established GOP figures like Sen. John McCain (R-Ariz.) but also fresh faces like Sen. Ron Johnson (R-Wis.).

The president is meeting with these politicians because other leaders of the GOP have expressed an unwillingness to pursue a so-called Grand Bargain, and it looks as if the relationship between the president and some of the GOP leadership was undermined by the previous debt ceiling discussions.

The government’s fiscal year will come to an end on September 30, and public debate on the issue of the debt ceiling, government spending, and the possibility of increased taxes — something many Democrats still favor if large spending cuts are going to go on the table — is accelerating just in time. The president, for his part, will be forced to defend the Affordable Care Act and announce a new chair of the Federal Reserve.

It’s worth pointing out that thanks to the sequester and the fiscal cliff tax deal, the federal deficit in fiscal 2013 is smaller than it was in 2012 and 2011. So while much of the debt ceiling debate will be old-hat conflicts of interest between Democrats and Republicans, the context of the discussions has changed.

Cumulative Deficit

Source: U.S. Treasury

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