Yellen wants a new system to stop debt-ceiling standoffs.

Treasury Secretary Janet Yellen Calls for New System to Manage Finances

Treasury Secretary Janet Yellen has called for a new system to manage the country’s finances in order to debt-ceiling standoffs.”>prevent future debt-ceiling standoffs that she says are “tremendously damaging.” Speaking at a Group of Seven (G7) conference in Niigata, Japan, Yellen reiterated her view that the only way to avoid the looming debt default is for Congress to lift the borrowing cap.

The Current Standoff

After a three-month hiatus, negotiations on raising the debt cap resumed on May 9 between President Joe Biden and House Speaker Kevin McCarthy (R-Calif.), but they ended with no breakthrough. Biden has insisted on a clean bill to raise the borrowing limit, while McCarthy and House Republicans have put forward a proposal that would pair lifting the cap by $1.5 trillion with $4.5 trillion in spending cuts over a decade. The president has rejected the GOP proposal and vowed to veto it if it reaches his desk.

The Treasury Department has warned that the United States could default as soon as June 1 if no deal is reached, while the White House put out an analysis that said even a “short” default could eliminate half a million jobs and that a “protracted” one could cost 8.3 million jobs.

Options for Resolution

Yellen has suggested that Congress could repeal the debt ceiling entirely, while Democrats have proposed bills to get rid of the debt ceiling entirely. Another possibility would be for the president to act unilaterally and raise the debt ceiling, which Congress could vote to override. The president could then veto that, requiring a congressional supermajority to override that veto.

Another idea that has been floated recently is that of a so-called “discharge petition.” House and Senate Democrats have signaled plans for such a move, which would force a vote on a clean debt-ceiling increase without the spending cuts Republicans have demanded.

The Consequences of Inaction

When the United States reached the $31.4 trillion debt cap in January, the Treasury Department started resorting to “extraordinary measures” to keep making payments on outstanding federal debt obligations and keep the government from defaulting. At some point, the scope to continue with those accounting maneuvers will run out and the government will face the prospect of being unable to meet its financial obligations—a moment known as the X-date.

When the X-date is reached and there’s no agreement in Congress to lift the cap, the Treasury Department will be unable to issue any more bills, bonds, or notes and can only make payments on the government’s debt obligations from incoming tax revenues. Debt-ceiling standoffs like the one gripping the country today have occurred nearly 80 times since the 1960s, Yellen said in Niigata, adding that “to go through this every couple of years is tremendously damaging.”

Yellen emphasized that the only way in the short term to avoid a default is to lift the borrowing cap, but said that having a debt ceiling in place creates a situation where “we can’t pay all the government’s bills, and I don’t think that’s any way to run the government.”

“The answer is there is no good alternative that will save us from catastrophe,” she said, adding that “the only reasonable thing to do is to raise the debt ceiling and avoid the dreadful consequences that will come if we have to make those choices.”

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