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House Budget Hearing on the Debt Ceiling

House Budget Committee

Why Congress Needs to Abolish the Debt Limit

Wednesday, February 16, 2022

Topline

  • Democrats, Russell, Sheiner, and Blessing advocated for abolishing the debt ceiling, warned of the consequences of brinksmanship, default, and their impact on everyday Americans, and argued that the debt limit does not prompt fiscal restraint.
  • Republicans and Mulvaney touted the benefits of the debt ceiling, criticized public spending levels, and recommended stabilizing certain current mandatory spending programs before expanding them or adding new programs.

Witnesses

  • LaJuanna Russell, Founder and President of Business Management Associates, Inc; and Chair of the Small Business Majority
  • Louise Sheiner, Robert S. Kerr Senior Fellow in Economic Studies; and Policy Director for the Hutchins Center on Fiscal and Monetary Policy, The Brookings Institution
  • Laura Blessing, Senior Fellow, The Government Affairs Institute at Georgetown University
  • The Hon. Mick Mulvaney, Former Director, Office of Management and Budget Testimony

Opening Statements
Chairman John Yarmuth (D-Ky.)

In his opening statement, Yarmuth touted strong economic numbers, legislation passed by Democrats, and discussed the outsized role and misuse of the debt ceiling in politics. He then explained the consequences of failing to raise the debt ceiling and partisan action on both sides to raise the debt ceiling to pass legislative priorities.

Ranking Member Jason Smith (R-Mo.)

In his opening statement, Smith stated that inflation is outpacing wage growth and that increases in prices are not temporary. He said that Democrats want to eliminate the debt ceiling to help what he called their radical, partisan agenda.

House Majority Leader Steny Hoyer (D-Md.)

In his opening statement, Hoyer called Smith’s comments irrelevant and said that the U.S. is one of the few countries in the world with a debt limit and that the U.S. should abolish the debt limit. He also characterized the debt limit as a tempting hostage that could trigger financial catastrophe and emphasized the need and current efforts to de-weaponize the debt limit. He then said that eliminating the debt limit would be an act of fiscal responsibility.

Testimony
Ms. LaJuanna Russell, Founder and President of Business Management Associates, Inc;and Chair of the Small Business Majority

In her testimony, Russell highlighted uncertainty caused by the debt ceiling dilemma and its impact on small businesses. She said that default would result in higher interest rates for small business loans, delay payments to contractors, and create a precedent where banks are more likely to deny small business loans due to increased risk. She added that eliminating the debt limit would provide greater stability for small businesses and that small businesses can no longer bear the uncertainty of debt limit negotiations.

Dr. Louise Sheiner, Robert S. Kerr Senior Fellow in Economic Studies; and Policy Director for the Hutchins Center on Fiscal and Monetary Policy, The Brookings Institution

In her testimony, Sheiner made three points: the debt ceiling does not serve any useful purpose, the risk of default is calamitous, and we should address overspending directly and not through the debt ceiling. She called the debt limit a political roadblock preventing the government from covering its obligations and added that the threat of default creates completely unnecessary economic stress for people and distracts policymakers from solving our nation’s problems. She continued to explain that sharp cuts in spending under a binding debt limit would likely lead to a recession. She also said there is little evidence that the debt limit adds to fiscal restraint and that decisions to address our long-term fiscal sustainability problems should not be made in a hurry when the country is being held hostage by the debt ceiling.

Dr. Laura Blessing, Senior Fellow, The Government Affairs Institute at Georgetown University

In her testimony, Blessing emphasized political brinksmanship, that raising the debt limit does not equal additional spending, and that both parties have a history of politicizing the debt limit. She discussed the historical reforms around the debt ceiling and that in modern times, the Treasury Department regularly uses emergency measures to avoid default. She added that there is little evidence that the debt ceiling provides fiscal restraint.

The Hon. Mick Mulvaney, Former Director, Office of Management and Budget Testimony

In his testimony, Mulvaney said the debt ceiling is the buzzer that goes off when the battery is low in your smoke alarm and that it is inconvenient to address but necessary. He added that just because it is hard to raise the debt ceiling does not mean Congress should not do it. He then stated that the debt ceiling rule is not broken and has resulted in passing certain pieces of legislation.

Question & Answer

Tax Cuts and Jobs Act

Rep. Hakeem Jeffries (D-N.Y.) engaged in a colloquy with Mulvaney regarding the Tax Cuts and Jobs Act raising the deficit under the Trump Administration. Rep. David Price (D-N.C.) also asked about the Trump tax cuts, and Blessing agreed that Democrats have been cooperative in raising the debt ceiling three times over the past decade.

Debt Ceiling Pros and Cons

Jeffries asked Sheiner if refusing to raise the debt limit is similar to blocking your checking account from paying your credit card bill, to which Sheiner said yes. Reps. Janice Schakowsky (D-Ill.), Sheila Jackson Lee (D-Texas), and Brendan Boyle (D-Pa.) asked about real-life consequences of breaching the debt ceiling. Russell said that businesses suffer because they cannot move forward, and their growth is hindered. She added that businesses are made of people in communities in a mutually dependent ecosystem and that using the debt ceiling as a political poker chip impacts that entire ecosystem. Sheiner said we have only seen inklings of what would happen, adding that everything would seize up because default causes uncertainty for businesses and people, for instance, if certain government payments do not come on time and that a one-month impasse would cause a sharp recession. She concluded that there is no reason to put people through this when the end result will inevitably be to raise the debt ceiling.

Rep. Judy Chu (D-Calif.) asked how Small Business Administration (SBA) programs contribute to the small business economy and how higher SBA interest rates would impact businesses. Russell said SBA support is critical to getting many small businesses up and running. Chu asked Blessing to discuss the impact that debt ceiling standoffs have on essential government services like revenue collection. Blessing said underfunding the Internal Revenue Service (IRS) is an incredibly important problem and that there are real costs to the government and our ability to collect what is on the books. She added that the tax gap should be a low hanging fruit for recouping some revenue in a serious way. Jackson Lee asked if abolishing the debt ceiling would bring members to the negotiating table. Sheiner said the debt ceiling is a distraction that creates disagreement and polarization and undermines U.S. credibility. Mulvaney said abolishing the debt ceiling would not necessarily prompt successful negotiations and agreements.

Rep. Pramila Jayapal (D-Wash.) asked how long it would take for the economy to recover after breaching the debt limit and what that would do to U.S. standing in the global economy. Sheiner said we do not know the answer but that it could take a very long time. She also said our borrowing costs would go up, our status as a global leader would suffer, and global markets would be thrown into turmoil. Jayapal asked about the consequences of allowing our current debt ceiling policy to persist. Sheiner said we are getting closer and closer to breaching the debt limit and creating economic risk.

Rep. Buddy Carter (R-Ga.) asked if Mulvaney is concerned the debt will crowd out other spending and result in negative economic impacts. Mulvaney said one of the causes of inflation is the size of government and that debt crowds out private sector spending and other government spending because government money will go to paying down debt. Carter asked about the positive effects of reversing trajectory and putting the government on a sustainable course. Mulvaney said we would see growth and benefits from more private sector spending.

S&P Downgrade

Smith asked about the circumstances surrounding the decision by S&P to downgrade the U.S. credit rating. Mulvaney said that S&P downgraded the U.S. after the debt ceiling deal and was a result of the compromise over the debt limit and kicking the can down the road, not because of bickering over the debt ceiling. Price asked what precipitated the S&P downgrade. Blessing said the S&P had threatened a downgrade earlier that year and that they had also threatened downgrades in earlier episodes of debt ceiling brinksmanship.

Recommendations

Smith asked what specific reforms Congress should consider as part of any potential debt limit increase, aside from abolishment. Mulvaney said Congress should address entitlements like Social Security, despite the political difficulty. Rep. Ben Cline (R-Va.) asked if we should be focused on stabilizing entitlement programs or making new programs. Mulvaney said we have to shore up Social Security and that it is prudent to take care of existing programs before expanding or creating new ones. Rep. Scott Peters (D-Calif.) asked if procedural reforms could move the ball forward on addressing the debt. Blessing said the safest possible thing would be to abolish the debt limit altogether. Peters asked if eliminating the risk of default should be something to consider. Sheiner said taking the uncertainty off of the table is needed and that any procedural reforms to do that would be a step in the right direction.

Rep. Jay Obernolte (R-Calif.) asked if Congress should abdicate its responsibility on this issue to the Executive branch. Mulvaney said it requires a change of political will and that Congress should not give more power to the Executive branch. Rep. Mike Carey (R-Ohio) asked where we would be today on the debt issue if we had passed a balanced budget amendment in the 1990s. Mulvaney said we would only be about $6 trillion in debt.

Inflation

Smith asked what sort of inflationary projections Mulvaney would apply if he were still in office. Mulvaney said inflation numbers are tough and are going to continue to be very large under the Biden Administration. Rep. Glenn Grothman (R-Wis.) asked if higher costs on Americans are caused by excessive government spending. Mulvaney responded that spending policies are pumping money into the system, causing inflation.

Interest

Rep. Lloyd Smucker (R-Pa.) asked when the right time will be to talk about deficit spending and the impact of the debt and expressed concern for interest payments. Mulvaney said interest payments could be bigger than every appropriations number except defense. Rep. Randy Feenstra (R-Iowa) asked how the Federal Reserve increasing interest rates will affect the debt. Mulvaney said if interest rates go up, we will see consequences from borrowing.

For more information on this hearing, please click here.

For an archive of past SIFMA hearing coverage, please click here.