President-elect Trump is right to want Congress to deal with the debt ceiling this week, before he takes office. Congressional Republicans should support Trump and pass a stopgap funding bill that averts a government shutdown and suspends the debt ceiling for at least the next four years.
The president-elect has made it clear that he doesn’t want to deal with the debt ceiling during his second term. Trump went so far as to offer his support for eliminating it entirely, telling NBC News this morning that getting rid of the debt ceiling would be the “smartest thing it [Congress] could do. I would support that entirely.”
Under current law, the debt ceiling is suspended until early next year. The government would run out of funds (most likely) by the middle of 2025 if Congress doesn’t act before then.
It makes sense that Trump would want the debt ceiling off Congress’s plate before he takes office. A messy fight over suspending (or lifting) the debt ceiling would interfere with his plans to cut taxes and increase spending on border security. For this reason alone, Republicans in Congress should include a debt-ceiling suspension in the government funding bill they will pass this month.
Dealing with the debt ceiling now would be a welcome development for financial markets, avoiding the uncertainty and volatility that would likely surround any debt-ceiling negotiations in 2025.
The debt ceiling is a limit on the amount the government can borrow. Suspending the debt ceiling does not increase government spending or authorize additional government spending. Instead, it allows the government to borrow money in order to finance the spending that Congress has already authorized.
If Congress ignores President-elect Trump and pushes this fight into 2025, it would risk a standoff that could result in the government defaulting on its financial obligations. That unlikely scenario would be a catastrophe. But even flirting with default is economically damaging. As I wrote in 2021 in the New York Times:
Rattled by dysfunction in Washington, consumers spend less and businesses hold off on hiring workers and increasing investment spending. Uncertainty is corrosive, reducing confidence, dynamism and risk taking.
How do we know this? Look back at the debt ceiling crisis of 2011, when Republicans demanded spending cuts in return for lifting the ceiling: On the day before Republicans finally agreed to raise the ceiling, the S&P 500 stock market index was down around 6 percent relative to its high point that year. Stock prices fell even further three days later, when the S&P downgraded the long-term credit rating of the United States for the first time ever. In the summer of 2011, Gallup’s Economic Confidence Index plunged to levels not seen since the 2008 global financial crisis. This brinkmanship over the debt ceiling pushed up interest rates, costing taxpayers an extra $1.3 billion in 2011 and $19 billion over the ensuing decade.
Actually defaulting would be even worse. Chaos would reign: plunging stock values, the stirrings of a fresh global financial crisis, an erosion of America’s credibility when it comes to honoring its debts. After a day or two of this calamity, the debt ceiling would almost certainly be raised through overwhelming bipartisan action.
But damage would be done. Investors would think twice about holding Treasury securities, fearing that fulfilling the basic functions of government is beyond Washington’s ability, leading to higher interest rates.
Congressional Republicans should listen to Trump and immediately pass a temporary funding bill to keep the government open and suspend the debt ceiling for at least the full duration of Trump’s second term. Because of the salutary effect this would have on advancing Trump’s agenda, House Republicans should rally behind Trump and be willing pass a suspension without support from Democrats.
But Democrats, many of whom have long opposed the debt ceiling, should be willing to cooperate. In exchange for their support for the stopgap funding bill, congressional Democrats should push to suspend the debt ceiling for much longer than the next four years. Fifty years would not be too long.