Editor’s Note: Jacob J. Lew served as US Treasury secretary from 2013 to 2017 and director of the Office of Management and Budget from 2010 to 2012 and from 1998 to 2001. The opinions expressed in this commentary are his own. View more opinion on CNN.
Earlier this week, Treasury Secretary Janet Yellen informed Congress that based on the receipts from recent tax filings, the United States may be unable to pay all of its bills as early as June 1 — less than one month from now. Congress must act now to extend the debt ceiling to clear the path for fiscal negotiations and to avoid default, a self-inflicted wound that would hurt our economy, burden hard-working Americans and damage our influence internationally.
The risk of defaulting on America’s debt is even greater today than it was in 2011, when I was director of the White House Office of Management and Budget, and in 2013, when I was secretary of the Treasury. Washington is even more polarized, and House Republicans’ demands are more extreme. The House passed a bill last month that they know is unacceptable to both the Senate and the White House, yet some House Republicans say that they will not support a less extreme final bill.
Even approaching default has very real consequences. In 2011, we reached an agreement at the 11th hour, but the brinksmanship led to a downgrade in our credit rating. And today, as the country approaches default, interest rates are already going up and demand down for Treasuries that would mature in the period when the debt ceiling could hit.
Higher interest rates mean higher costs, both for taxpayers who foot the bill for billions of dollars in higher interest costs, and private borrowers who face higher rates for their mortgages and personal loans. And for the Treasury market, the deepest and most liquid in the world, less demand means both higher cost and a risk that there will not be buyers for debt that matures in the window.
In 2011, the US saw more than $1 billion in higher interest costs and real anxiety around the world — and that was a case in which the US did not actually default. The cost and loss of confidence would only be greater if a default were to actually happen.
Default is not an option. Failing to make interest and principal payments to bondholders would be a credit default. And it would also be default if the US government fails to pay its other bills — benefits to American families, funding owed to states and localities for things like school or health care, and payments to businesses for work already done and goods already delivered.
Congress authorized spending that is already underway and set the tax policy that falls short in terms of revenue collected. Failure to raise the debt ceiling would mean defaulting on one obligation or another, because there simply will not be enough money in the Treasury to pay all the bills.
This is not an economic crisis; it is a manufactured political crisis. It is not a question of whether the government of the United States is fiscally sound; with the debt ceiling raised, the US remains the safest investment in the world. The definition of risk-free investing is to buy a US Treasury bill or note.
It is a question of whether our political system still works.
The House bill is not a solution, or even a serious negotiating position. It would repeal most of President Joe Biden’s signature climate legislation, the most significant US effort to address this existential threat. The House bill says it freezes appropriated spending, but after exempting defense and veterans programs, it would reduce funding for everything else — education, health research, child care and other critical services — by a third in 2024, with cuts growing deeper over time.
The bill also would jeopardize the health and well-being of low-income Americans by taking away food assistance, health coverage and income assistance (for the very poorest children) when adults are not able to prove that they meet a rigid work requirement or qualify for an exemption, creating a wall of red tape that has proven ineffective in states that tried a similar approach. And the list goes on.
Negotiations over whether to raise the debt ceiling and protect America’s good credit should never be on the table, but negotiations over fiscal policy are surely appropriate. With Republicans taking taxes off the table and Democrats and Republicans agreeing that areas like Social Security, Medicare and defense are off limits this year, that leaves a relatively small share of the budget as the fiscal decision for this year. And that decision needs to be made so Congress can write spending bills for the fiscal year that begins on October 1.
Neither side will be entirely happy with the outcome, but that is how decisions on budgets are made when parties with very different views need to work through the differences. And the sooner the better. That’s why President Biden has invited leaders of Congress to the White House to discuss the budget next week.
But those negotiations take time and cannot take place under threat of default. Time is running out, and Congress should immediately extend the debt ceiling until after the next presidential election so budget negotiations are not clouded by the looming threat of default. If that is not possible, the debt ceiling should be suspended until the White House and Congress can reach a regular budget agreement.
If they fail to reach an agreement by October 1, that would raise the risk of a government shutdown. Bad as that would be, it is far less dangerous than default.
