Yellen calls for 'very destructive' debt limit to be abolished

Treasury Secretary Janet YellenJanet Louise YellenUS deficit hits .8 trillion, second largest in history Financial oversight panel unveils climate risk plan On The Money — Democrats eye tough choices as deadline looms MORE said Thursday she supports abolishing the federal debt limit, calling it a “very destructive” threat to the full faith and credit of the U.S.

In congressional testimony, Yellen argued it made no sense to limit the Treasury's ability to pay bills already approved by Congress and the president with an arbitrary cap on how much debt it can issue.

“When Congress legislates expenditures and puts in place tax policy that determines taxes, those are the crucial decisions Congress is making,” Yellen said during a hearing before the House Financial Services Committee, where she appeared beside Federal Reserve Chair Jerome Powell.

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“And, if to finance those spending and tax decisions, it's necessary to issue additional debt, I believe it's very destructive to the president and myself, the Treasury secretary, in the situation where we might be unable to pay the bills that result from those past decisions.”

Yellen’s call to abolish the debt limit comes with roughly three weeks before the Treasury Department is on track to run out of cash and extraordinary measures to avert a default on the national debt. She told lawmakers Tuesday that the U.S. is on track to default by Oct. 18 without action to raise the debt ceiling.

Republicans have vowed to block any bill that would increase the debt ceiling despite suspending it three times under former President TrumpDonald TrumpHillicon Valley — Presented by Xerox — Twitter's algorithm boosts right-leaning content, internal study finds Ohio Democrat calls Vance an 'ass----' over Baldwin tweet Matt Taibbi says Trump's rhetoric caused public perception of US intelligence services to shift MORE, insisting Democrats must do so on their own through the budget reconciliation process. Democrats, meanwhile, have blasted Republicans for refusing to support a measure that would allow the Treasury to pay off debt accumulated over several decades and under both parties.

Raising the debt ceiling does not directly affect the size of the national debt or future congressional spending. Doing so simply allows Treasury to generate more cash to cover expenses already approved by lawmakers and the president by selling bonds. The debt ceiling will also need to be raised regardless of future congressional spending since federal revenue will not come in fast enough for the government to pay off bills as they come due.

"It should be bipartisan in recognition of the fact that both Republican administrations and congresses and Democratic ones have run budget deficits for most of the post-[World War II] period with only a few years serving as an exception," Yellen said.

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"That requires on a regular basis raising the debt ceiling," she continued. "The need to do so has nothing to do with future spending or tax plans.

Even so, Republicans have insisted that Democrats bear sole responsibility for raising the debt ceiling on their own because they are attempting to spend trillions of dollars more on Biden's sweeping economic agenda.

"Since Jan. 20, the approach of this Congress is that they do not need Republican votes to do anything. That's been the approach, and now they want the political cover in the midst of this massive amount of new spending," said Rep. Patrick McHenryPatrick Timothy McHenryHouse Democrats scramble to save housing as Biden eyes cuts Congress needs to step up on crypto, or Biden might crush it Yellen calls for 'very destructive' debt limit to be abolished MORE (N.C.), the ranking Republican on the Financial Services panel.

McHenry also criticized Yellen for only seeking his vote in a phone call last week, instead of months earlier when Republicans first warned that they would not raise the debt limit.

"I've been a part of the solution for last decade, and the call that I received from you last week was the first outreach I've had from this administration to do something on a bipartisan basis," McHenry said, referencing his previous votes to raise the debt ceiling.

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"I'm grateful for the outreach from you, but it speaks to the larger issue for the administration," he continued.

Yellen countered that Democrats helped Republican lawmakers pass a debt ceiling hike in 2017 even though the GOP was steaming ahead on a $1.9 trillion tax cut they passed through budget reconciliation, the same process Democrats plan to use for Biden's multitrillion-dollar social services and climate bill.

Democratic lawmakers also ripped Republicans for tying their willingness to keep the country solvent to political concerns.

"I've been here for 22 years," said Rep. Gregory MeeksGregory Weldon MeeksPowell death leads to bipartisan outpouring of grief US faces daunting task in relationship with Haiti Overnight Defense & National Security — China steps up saber rattling MORE (D-N.Y.), "and each time, when it came to the credit of the United States and our economy, it didn't make a difference to me whether or not the administration was Democratic or Republican, or whether or not someone called me to ask me for my vote."

While both parties have historically used the debt ceiling to extract spending concessions from the other side, recent standoffs over the limit have done nothing to reduce the size of the national debt. 

Financial and economic experts also say a default on the national debt could be catastrophic to both the U.S. economy and global financial system given the world's reliance on the U.S. dollar and Treasury bonds as bedrock for international commerce.

The ineffectiveness of the debt ceiling as a fiscal control and the high stakes of breaching it have prompted liberals and conservatives alike to call for its abolition or reform. Yellen added that with interest rates at effectively negative rates, the U.S. has no economic reason to prioritize reducing the debt over keeping the country solvent.

Powell, a Republican who urged lawmakers to reduce the debt before the pandemic, did not say whether the debt ceiling should be eliminated but largely agreed with Yellen's call for a swift resolution to the standoff.

"If we were to default on our obligations, no one should assume that the Fed or anyone else can fully shield the American people from the consequences," Powell said. 

Updated at 1:10 p.m.