Opinion | A how to guide on how to destroy an economy

The debt ceiling is a self-inflicting handicap.

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Ayrton Breckenridge

U.S. Sen. Joni Ernst (R-Iowa) speaks to a crowd on Thursday, April 1 at an Iowa GOP regional reception in Cedar Rapids at the Elmcrest Country Club.

Shahab Khan, Opinion Columnist


In order to safeguard the economy from political sabotage, Democrats need to abolish the debt ceiling.

For policymakers and political strategists looking to destroy their industrialized country’s economy, weaponizing an arbitrary limit on how much the country can borrow is a brilliant tactic. This is the approach adopted by the Republican Party in an effort to torpedo President Joe Biden’s legislative agenda and his chances of reelection.

Of course, Republicans are not going to come out and openly say they are trying to defeat Biden in the game of thrones at the expense of the economic well-being of the American people.

Explaining why they did not vote to increase the debt limit, Sen. Joni Ernst and Rep. Ashley Hinson used the same languorous postulations about how Democrats’ reckless spending has maxed out America’s credit card and any breach of the debt ceiling would drive up inflation to levels that hurt the economy.

By their logic, we must be fiscally responsible by taking upon the most fiscally irresponsible action; force the U.S. to default and wipe out $15 trillion in household wealth.

First, the analogy that the U.S. has to pay its debt like households do with credit card bills is ridiculous as households cannot turn their debt into legal tender. The Treasury Department issues its debts as securities: assets that are traded on the open market by investors.

In times of economic crisis, one of the strategies of the Federal Reserve is to use cash to buy treasury bonds from investors. Due to the easy access to liquidity, the yields on treasury bonds are relatively small — compared to other securities, such as stocks — leading to low-interest payments on the debt.

Furthermore, U.S. treasury bonds have the backing of the U.S. government, the most powerful entity in the world. This gives investors confidence that the security they are buying is comparatively less risky than other securities. Thus, even after treasury bonds mature, investors just buy more treasury bonds allowing the U.S. government to refinance its debt with more debt.

In other words, thanks to the high credibility that treasury bonds have among global investors, it is impossible for the U.S. to go bankrupt. Unless that is, the country cannot issue any more bonds because it has breached the debt limit.

Next, taking a look at expansionary fiscal policies and deficits of the past, it becomes clear that ballooning deficits and debts do not contribute to inflation as much as other inputs, such as supply chains.

During the post-Great Recession recovery, Republicans were up in arms about how government spending and loose monetary policy would create an economic climate in which inflation would become embedded within the economy. That is far from the truth.

The high rates of inflation seen during the recovery were, as it is now, transitory. The reason is that the inflation we have seen in recent economic crises  has been cost-push. This means that slowdowns in global supply chains cause prices to rise, not fiscal and monetary policy.

Once supply chains are able to get back to normal, the price of regular goods decreases. If inflation were really embedded, the price of sticky goods such as wages and rentals on capital would also increase, something the data does not show.

In the current economy, large debts have not led to the inflation that Republicans claim is right around the corner. As a result, a debt ceiling does not make any sense from an economic standpoint.

However, in today’s political climate, taking the economy hostage and allowing the U.S. to default on its debt seems like a winning strategy. This cannot be sustained and we must abolish the debt ceiling.


Columns reflect the opinions of the authors and are not necessarily those of the Editorial Board, The Daily Iowan, or other organizations in which the author may be involved.


 

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