The American government dances on the edge of sovereign default. Again.
America’s debt ceiling is a great microcosm of the country’s issues with political polarisation. The debt ceiling though self-imposed if breached would lead to a default. Its main function is to give the opposition party a strong negotiating position, and so far that has paid off. Every time America restarts its debt ceiling tango it ends in an agreement which raises the debt ceiling, avoiding disaster and promising that the dance will begin anew in the future. It’s an ingenious system for slowly and gradually increasing the risk of a default while pretending to be a useful measure against extravagant government spending.
No opposition party has the incentive to get rid of the debt limit; sure it might be better for the country and would eliminate a headache if the opposition is in government the next time the music starts playing, but it would also be a thoughtful gift to the incumbent administration and would risk the opposition looking weak on fiscal responsibility. At the same, it provides a valuable opportunity to get some of the opposition’s policies enacted in exchange for averting self-made disaster. Polarisation makes it costly and difficult to negotiate with the other side, so it becomes an easier sell to ones’ voters to agree to tough compromises when the deadline looms large. At the same time though, the negotiating process is contingent on specific individuals. President Joe Biden will negotiate with Republican speaker of the house of representatives Kevin McCarthy, Biden even shortened a diplomatic tour to get more face time with McCarthy. That creates the risk of poor personal chemistry or health problems dooming America to default.
At the same time, the dance deepens existing polarization. It’s easy to harden in ones’ distaste for the other side if they cynically use the debt ceiling debacle and risk a default for political gain. The debt ceiling is in that way a remarkable piece of institutional design; a self-reinforcing process automatically raising the stakes. It wouldn’t be out of place as a punitive measure imposed on the losing side of a war. Instead, it was voluntarily enacted as a measure to increase fiscal responsibility.
This current dance will certainly end the way the previous have, with a deal reached before disaster strikes. Two unhappy dancers who got through by the skin of their teeth. But with dancers as old and unreliable as Joe Biden and Donald Trump it’s a matter of time until someone makes a wrong move. Observers seem to agree that the stakes are too high for a deal not to be reached. I agree. This time. But the tango will continue until the debt ceiling is abolished or the music stops. Biden and McCarthy will manage this dance, but every encore will be more difficult than the last.
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I've always been interested in politics, economics, and the interplay between. The blog is a place for me to explore different ideas and concepts relating to economics or politics, be that national or international. The goal for the blog is to make you think; to provide new perspectives.
Written by Karl Johansson
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Cover photo by Marko Zirdum from Pexels, edited by Karl Johansson