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The US Debt Ceiling Debacle Is Not Over

The latest last-minute deal to raise the US debt limit does not solve the underlying political problem. On the contrary, with the country on track for a Biden-Trump rematch next year – a contest that Trump just might win – the truce is likely to be short-lived.

CAMBRIDGE – The tentative deal that was just struck to raise the United States’ debt ceiling won’t make the problem go away. Partisan standoffs over the federal debt limit have become a predictable feature of American political life. And while some blame an ill-conceived rule, that argument misses the point.

The real source of the problem is that politicians today have little incentive to compromise. In an environment of gerrymandered electoral districts and ideologically-siloed traditional and social media (amplified by bots, algorithms, and economic incentives), the instability will only worsen in the foreseeable future. That could mean more frequent government shutdowns or more restrictions on central bank independence. With former US President Donald Trump very much in the mix to return to the White House after the 2024 election, who knows what else.

The idea that hitting the debt limit will force the US to immediately default on its bond obligations is a canard. The government takes in more than enough tax dollars to pay the interest on debt, and the debt ceiling creates no obstacles to rolling over maturing debt as it comes due.