About Courses CV Newsletter Research Twitter Views

Good Ideas that Might Find Favor In a New Era
In the interest of finding common ground, here are 17 policy proposals for the Biden team from the Mercatus Center

Charles Blahous, et al.
Discourse Magazine
Published January 21, 2021 (504 words)

Increase the Debt Limit Before It Expires

When the federal debt limit suspension expires on Aug. 1, the U.S. Treasury would need to dramatically slash the amount of debt it issues. This reversal would break its commitment to issue debt in a “regular and predictable” way. What’s more, the cash on hand will be dangerously low, risking default on government obligations. If there were an emergency, the government would not have enough cash to handle it. Even if the debt limit is eventually increased after the deadline, it is difficult for investment banks and securities traders to handle a sudden flood of newly issued debt. As with the debt limit episode in 2019, we might again see Treasury markets dry up and yields spike, lowering the value of bank capital and collateral for derivatives. Last time, the Federal Reserve fixed these markets with enormous Treasury purchases and repo operations. Debt limit increases usually require bipartisan cooperation to pass the Senate’s 60-vote threshold. However, Democrats could include the suspension in their COVID-19 spending package, which could bypass a Senate filibuster through a process called reconciliation. —Christopher Russo

Lock in Low Borrowing Costs for a Generation

The national debt held by the public now stands at 98% of gross domestic product, and the Congressional Budget Office projects that this will reach 107% in 2023, the highest in history. Worse, these projections ignore the looming insolvency of the Social Security and Medicare trust funds, as well as the government’s many off-balance-sheet liabilities. But for now, the federal government can still borrow long term at less than 2% a year. Treasury Secretary-nominee Janet Yellen should lock in low rates for a generation. Lengthening the maturity of marketable Treasuries, which now averages only 5½ years, would provide time to fix the government’s long-term budget problems. And it could also lower interest-rate expenses over time. Treasury’s Office of Debt Management has already researched offering 50-year and 100-year bonds. If the Treasury is concerned about the liquidity of these offerings, it could issue perpetuities (bonds with no fixed maturity date) at a 2% coupon rate. These bonds would be highly liquid because each new issuance is a reopening of the same product. Lengthening the average maturity of the government’s borrowing would also hedge against financial and geopolitical risks. As of last November, major foreign holders owned $7.1 trillion of Treasury debt. Japan and China are the largest foreign holders, at $1.3 trillion and $1.1 trillion, respectively. If foreign demand for U.S. debt weakens due to geopolitical tensions, it may be difficult for the domestic market to pick up the slack. And the possibility of foreigners bypassing U.S. debt in favor of other countries’ debt grows as countries build alternatives to the dollar payment system, such as China’s “digital yuan.” When asked about refinancing the government’s debt in her confirmation hearings this week, Yellen noted that “there is an advantage to funding the debt, especially when interest rates are very low, by issuing long-term debt.” She should seize the day. —Christopher Russo