By John Lavelle
American politics can be described with many adjectives today, one of which could be divisive. In this spirit, the US Congress has returned to debating one of its most popular questions: should the U.S. debt ceiling be raised, and if so, by how much? How common is it to raise the ceiling? Well, since 1945, the US Congress has raised it over 100 times, and the ceiling has basically doubled each decade since 1980. But what is it, why does this happen so often, what does it mean to raise or not raise the debt ceiling, and what is unique to this current crisis today? And more importantly, why must the debt ceiling this time be raised by any means available.
First, the debt ceiling is a legislative limit on how much debt the US Treasury can incur, or more simply, the maximum the Federal Government can borrow. The debt is ‘owed’ to the US public through programs such as Social Security and Treasury bonds that US citizens or other nations have bought. Importantly, this does not change the amount of debt (or deficit) the US has, but merely restricts the Treasury’s ability to borrow in order to finance it. In effect, it can only restrain the Treasury from paying for expenditures and other financial obligations after the ceiling has been reached or surpassed.
The reason why the debt ceiling is a routine issue is due to the fact that the US spends more money than it receives from taxes and customs. Last year, the US government revenue was $3.42 trillion, while it spent $6.55 trillion. Moreover, when the ceiling is raised, it is only done so by an average of 8% or so. The great spending compared to the small raise of the ceiling causes the debt limit to be a routine and common issue in US politics.
The decision to raise or not raise the debt ceiling carries much political and economic weight. The effect of raising it is relatively straightforward. The Treasury Department goes back to normal, and the government is legally allowed to borrow money in order to pay its financial obligations. Basically, America is raising its “credit card” balance.
But what happens if the ceiling is not raised? Basically, America would default. The exact effects of this are unknown, since America has never defaulted, but the projections are grim. By defaulting, the federal government would signal that they could not pay their bills to its many debtors, most notably being the US citizens. Many American social plans, such as Food Stamps and Social Security, would cease to exist and public sector employees, past and present, would not be paid nor would they receive a pension. It is mostly conjecture after these immediate effects, centered around how “bad” the situation develops. At best, which would be highly unlikely, just the immediate effects occur, and at worst (which is more likely), there would be a depression that rivals, if not surpasses, the Great Depression. Millions of jobs would be lost, the stock market would crash, and interest rates would rise dramatically. For example, when America nearly defaulted in 2011, the S&P 500 dropped by 18%. Moreover, the faith and trust in the American government would completely evaporate and public projects would grind to a halt. The U.S. dollar would most likely stop being the world’s reserve currency, resulting in higher relative prices for imported goods. Globally, the situation would be equally as bad. Millions, if not hundreds of millions, would lose their livelihoods and the global markets would crash. The global financial system would cease to exist as it is today, and the overall effects would be unpredictable. With the certain negative repercussions to all citizens of the world, not just Americans, it is clear that an unraised debt ceiling should be avoided.
Luckily, there are many similarities to previous debt ceiling impasses. For one, both parties agreed that it should be raised while one party, this time the GOP, is against a bipartisan solution. This is due to the GOP’s opposition to the great government spending under Biden as well as the new tax plan the Democrats are planning to announce before 2022—The most important reason (at least in name) for whether or not the debt limit should be suspended. Both sides are digging in their heels, sticking to their party’s traditional view on government spending. These criticisms and conflicts have led to more bipartisan squabbling about who is at fault for the deficit. This debate also has many unique variables, the most alarming being the brazen brinkmanship being displayed. Both sides are playing a game of ‘chicken.’ The Republicans have threatened to filibuster and shutdown the federal government while the Democrats have both threatened to raise the ceiling themselves and to let it be reached without raising it. The former is straightforward political strategy and tactics, while the latter is paradoxical.
The reason why is because the Democrats could single handedly raise the ceiling through reconciliation but not through suspending it. This is due to the fifty-one votes needed for reconciliation and sixty for suspension in the Senate. The Democrats have recently proposed a bill to suspend the debt limit until the end of 2022, which the Republicans, most notably Mitch McConnell, are vehemently against. The bill was passed in the House, but the bill will most likely not pass in the Senate. Hope is not lost though due to reconciliation. Reconciliation bills are bills that both override the filibuster and avoid a supermajority that are only invoked for budgetary legislation. The Democrats do not want to raise the ceiling by this procedure, as they would receive all the negative press about raising the debt ceiling while not being able to suspend it either. This could easily happen, even with the short deadline. The Democrats would only need to propose and vote on the reconciliation bill, a process that would take less than a work week. However, the Democrats do not want the sole responsibility of raising the ceiling. Although necessary, high government spending is viewed as unpopular by all citizens, even though technically the debt ceiling does not increase the amount of debt America has; however, it still does allow the federal government to spend more, which could lead to an increased deficit. Hence, why the Democrats are reluctant to use the reconciliation bill and raise the ceiling without Republican support.
On October 1st, Joe Biden signed legislation to fund the government through December 3rd of this year. It passed the House by a vote of 254-175 and 65-35 in the Senate. The core issues have still not been resolved, but the vote provides a brief respite from a potential government shutdown and default.
Maybe with the extra two months, a more concrete and longer-lasting solution can be reached by both sides of the aisle. Due to the reasons stated above, the ceiling should be raised, regardless of its possible suspension. Ideally, a bipartisan solution would be reached, as the debt ceiling raise is one of the few issues in which both parties agree. If no bipartisan solution can be agreed upon, the buck stops with the Democrats; due to their control of the House, Senate, and Presidency. They must push a reconciliation bill through, and hope that the American public recognizes the need to raise the debt ceiling, even if the solution is temporary and partisan.
The views expressed in this article are the author’s own, and may not reflect the opinions of The St Andrews Economist.
Photo by Ajay Parthasarathy on Unsplash