Just the Facts
Just the Facts: Debt Ceiling
By Emma Petasis
October 21, 2015 | Blog
First, the broad strokes:
- The U.S. spends more than it brings in, forcing us to borrow money and take on debt.
- Congress sets a limit on how much debt we can hold before we have to stop borrowing – that’s called a debt ceiling.
- Congress can choose to raise that ceiling when we reach it, and has 74 times in the last 53 years.
- Failure to raise the ceiling doesn’t reverse spending or reign in debt, only a strategic plan for fiscal restraint can do that.
- The stakes for not raising the debt ceiling are massive, meaning Congress will almost certainly raise it. But there is a good chance there will be a messy fight first.
Want to really understand what’s going on? Keep reading, we’ve made this painless…
What’s the debt ceiling?
Much like your irresponsible sibling, the federal government can’t resist spending even when the money isn’t there. In order to maintain this habit, the government consistently borrows money from others, including countries like China. The result of this borrowing is an ever-growing mountain of debt.
Because the government regularly takes on debt, Congress passed a law in 1917 to create something called the debt ceiling. This law allows the Treasury to borrow money without having to go to Congress every time – at least until we reach a pre-set limit (or a ceiling). Once the government reaches that ceiling, Congress needs to decide whether to raise it again or default on their debt. We’ll get to that a bit later.
Is raising the debt ceiling a bad thing?
Currently the government has $18.1 trillion of debt. To give you a little context – that’s enough money to buy every single American a brand new Porsche!
While economists debate the level at which debt is acceptable, there is no question our ballooning debt is indicative of America’s larger struggle to address long-term problems with no easy solutions.
But here’s the thing – while raising the debt ceiling sounds irresponsible, it’s actually not the ceiling that’s the issue. Congress has already voted to spend money we don’t have, and failure to raise the ceiling won’t reverse spending or reign in new debt. Choosing to not raise the ceiling is like choosing to not pay a credit card bill. Fiscal responsibility starts with a plan for bringing the federal budget into balance.
So if raising the debt ceiling isn’t the main problem, why do politicians keep making a big deal about it?
For one, it’s symbolic of our increasing federal debt problem. The idea that we’re constantly spiraling deeper into debt is something that most Americans have an adverse reaction to (for good reason), and politicians know that too. Raising the debt ceiling sounds like Congress is enabling wasteful spending, even if Congress is really agreeing to pay for bills already owing on the federal government’s “credit card”.
It also makes for great leverage. Failure to raise the debt ceiling could have drastic consequences, and so the threat of inaction gives Congress a bargaining tool to get something else they want in the legislative arena. This routine – governing by crisis and holding our economy hostage – is exactly what America needs less of.
What would happen if politicians follow through on this threat and don’t raise the debt ceiling?
Terrible, horrible, no good, very bad things.
If Congress does not raise the debt ceiling on time it would lead to a default, meaning the Treasury would be unable to make good on payments as they come due. This would lower the government’s credit rating in the bond markets and shake confidence in our economy around the world. Any government spending would have to come from solely new revenue leading to massive and immediate across-the-board cuts. Doctors won’t get their Medicare checks, seniors won’t get their Social Security checks, and countless other groups that rely on payments from the government will be out of luck.
All of this would lead to a stock-market downturn, plunging consumer spending, skyrocketing interest rates, etc. I told you it was bad…
Even the threat of default is consequential. Financial markets run on confidence, and so the mere idea that leaders are willing to ignore our interest payments could scare investors.
What are the prospects that Congress will raise the debt ceiling again?
Because the consequences are so devastating, it is unlikely that a significant coalition of lawmakers would be willing to force a default. The debt ceiling has been raised 74 times since 1962, expect it to be raised again in 2015.
However this is Congress we’re dealing with, remember? So nothing is easy. It is likely that before it’s raised, there will be a messy fight.
This year could be especially messy due to poor timing. The Treasury is set to “hit the debt ceiling” at around the same time as our annual budget deadlines. This increases the likelihood that Congress will use the debt ceiling as leverage in other spending battles going on at the time.
So the real question is not if they will raise the debt ceiling, but whether Congress can strike a deal safely on time, or if this will turn in to yet another example of political brinkmanship. The main concern will be whether lawmakers think it is in their best political interests to govern responsibly or prove to constituents they’re ready to fight for ideological principles.
This whole thing seems like a mess, is there any plan for a long term solution?
We’re glad you asked. Yes! And you can help us fight for it.
There are strategic reasons to take on debt and raise the debt ceiling. But at this juncture, the U.S. government isn’t thinking strategically, and it’s certainly not thinking long term.
Failure to deal with our debt problem could eventually lead to spiraling interest rates and fewer resources to fund essential priorities ranging from infrastructure and education to defense.
The budget trajectory we’re on is unsustainable and we ignore this warning at our peril. That’s why America’s leaders need to commit to putting the federal budget into balance.
The best hope to get American back on track is to deal with the issues before they become bigger crises.
That is exactly why we’re working to create a National Strategic Agenda. This is a new governing framework that, among other things, aims to bring the federal budget in balance by 2030. By working with both parties to make this a bipartisan goal, our aim is to get America back on the right fiscal track.