The debt ceiling is a term many readers have heard, but it can be confusing for others who are not part of the world of government budgets. According to CNN, “the debt ceiling is the maximum amount the federal government is able to borrow to finance obligations that lawmakers and presidents have already approved.”
Generating Debt Is a Natural Part of Government Business, But Controlling Rising Debt Is Crucial
Generating debt is a natural part of doing government business. Alexander Hamilton said it best in his first report on public credit: “The United States debt, foreign and domestic, was the price of liberty. The faith of America has been repeatedly pledged for it…Among ourselves, the most enlightened friends of good government are those whose expectations of prompt payment are the highest. To justify and preserve their confidence; to promote the increasing respectability of the American name; to answer the calls of justice; to restore landed property to its due value; to furnish new resources, both to agriculture and commerce; to cement more closely the Union of the States; to add to their security against foreign attack; to establish public order on the basis of an upright and liberal policy; these are the great and invaluable ends to be secured by a proper and adequate provision, at the present period, for the support of public credit.”
Hamilton’s message is simple. In other words, what he was saying is that when you’re trying to grow, you need a cash flow. When your income is not large enough, then borrowing is a necessity.
But the rising debt in the U.S. has caused concern among leaders and economists over the years. Proponents of the debt ceiling are concerned that interest paid on the national debt could instead be used more effectively elsewhere; they are also worried that the national culture of debt promotes irresponsible fiscal behavior.
[Related article: Entitlement Spending Is the True Cause of the Rising National Debt]
US Treasury Taking ‘Extraordinary Measures’ to Deal with the Debt Ceiling Problem
Congress has raised the debt ceiling dozens of times since 1917. On Jan. 19, that debt ceiling was reached yet again.
In a letter to the Speaker of the House of Representatives Kevin McCarthy, Treasury Secretary Janet Yellen informed him that the newest debt ceiling has been reached. As a result, she will now need to take what federal law calls “extraordinary measures.”
These extraordinary measures are really bookkeeping strategies at this point. Yellen said that the U.S. Treasury will not add new investments to the Civil Service Retirement and Disability Fund and the Postal Service Retiree Health Benefits Fund.
Because the debt is an intragovernmental debt – a debt owed by one federal agency to another – that is why Yellen has chosen to use extraordinary measures. As a result, the default on the national debt will be delayed until the early summer of 2023, depending on the extent of the revenue collected by the Internal Revenue Service (IRS).
If the debt ceiling is not further increased, there will likely be a government shutdown of some kind. But even a government shutdown will not prevent a default of debt by the U.S. government.
Such a default could have dramatic effects on the dollar, the stock market and the job market. For instance, if the U.S. defaults on debt payments, that will make it harder to borrow money.
It will lower the faith of investors in the U.S. dollar. As a result, the dollar will be less powerful and that will limit the buying power of U.S. companies in foreign countries. Such an unprecedented event will also lead to havoc in the stock market, since it will raise questions as to the stability of the entire market and that in turn will influence the job market.
Negotiations in Congress to Resolve the National Debt Will Not Be Easy
With the makeup of the current House of Representatives, negotiations in Congress will not be easy. Sara Dorn of Forbes notes: “Fears of a debt limit showdown grew earlier this month, when far-right Republicans in the House proved they are willing to take extreme measures to convince leadership to give in to their demands. McCarthy was elected after 15 rounds of voting – the first time in 163 years the election has surpassed 11 rounds – and only after giving into major concessions demanded by a group of 20 right-wing lawmakers, some of which affect the debt ceiling negotiations.
“Among them is a provision that requires Congress to hold an individual vote on raising the borrowing cap, rather than passing it as part of a budget resolution. The deal also included a promise from McCarthy that Congress would not agree to raise the debt ceiling without significant spending cuts. It’s unclear what, exactly, those cuts would entail, but some Republicans have floated raising the age for Medicare and Social Security eligibility in an effort to reduce the federal deficit.”
A government shutdown would affect everyone. For instance, the longest shutdown in history (Dec. 22, 2018 to Jan. 25, 2019) was the result of President Trump and Congress not reaching an agreement concerning the appropriations bill, according to the New York Times.
This shutdown resulted in the suspension of all non-essential activities by the federal government and the ripple effects were felt around the world. It has a direct effect on the economy and services to ordinary citizens.
The next few months will prove interesting. McCarthy will have to deal with a large group within his political party that sees Washington’s fiscal culture of as the source of most of the ills of America. They will have many demands if there is any hope of reaching an agreement.
The Republicans will want to see significant budget cuts and a change of the internal culture in federal government circles. However, it is anybody’s guess how this debt ceiling issue will be solved.