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Explainer: What is a Debt Ceiling? Can It Break?

Monday, April 18, 2011

We're not getting any room to breathe between budget battles.

After narrowly avoiding a government shutdown, which would have been precipitated by a stalemate over spending for the current fiscal year, new standoffs surrounding the nation's long-term debt are already on the horizon.

Specifically, the next debate will be about the United States' debt ceiling. Currently set at $14.29 trillion, the ceiling is a somewhat arbitrary cap set on the amount of debt that the Treasury can issue; arbitrary, because Congress is always changing it. Since 1962, it's been raised 74 times in order to keep the federal government from defaulting on its obligations. We keep upping the limit in order to borrow enough money to pay for the ever-increasing number of things that government does.

But government doesn't do anything without being told to. Debt is legislated; Congress risks it whenever it decides to reduce revenue through tax cuts or increase outlays through new government programs and services.

Therefore, raising the debt ceiling is not the same thing as contributing to the national debt, which we do all the time. It might be useful to think of the former as a speed bump for the latter: it's a signal to slow down and re-evaluate where fiscal policy has taken us. Whenever Congress raises the debt ceiling, it essentially says, "We don't have to become really concerned about the debt until it gets close to this number."

Every time that's happened, Congress has raised the ceiling. They've never said no, and they probably shouldn't: conventional wisdom says the consequences would be so dire as to set the world economy ablaze.

If Congress doesn't decide to raise the ceiling, the United States almost certainly maxes out its borrowing power, leaving the government unable to pay any of its obligations. Military salaries, Medicare and Social Security benefits, tax refunds, and unemployment insurance among many other things would all grind to a halt. Borrowing costs would soar, home values and retirement savings would decline, and worldwide faith in the dollar would shudder. There's no understating how grim the scenario could be. Confronted with this picture, the government shutdown everyone was worrying about last week suddenly looks Utopian.

As of last week, the United States is a mere $86 billion below the debt ceiling. The Treasury projects that government spending will reach its limit by mid-May unless Congress raises the cap. That's cutting it pretty close. Now would be the time to raise the debt ceiling; actually, according to Treasury Secretary Tim Geithner, last month was the time to raise the debt ceiling. But we didn't do it. We haven't done it. And perhaps unsurprisingly, there are more than a few politicians who don't want to do it at all.

Many Republicans, especially Tea Party favorites, equate raising the debt ceiling with signing off on more government spending. That's unacceptable to former Minnesota Governor and 2012 presidential hopeful Tim Pawlenty, who's hosting a petition headlined "Reject the Debt Ceiling Increase!" on his campaign site.

Pawlenty insists that he's not rooting for the government to default; everyone knows that would be bad. Rather, Pawlenty and other Republicans want to see Congress and President Obama pass a law "directing the Treasury to sequence our spending and prioritize the payment of interest and principal on the debt, as well as other critical budget items such as the military."

Instead of raising the debt ceiling, Pawlenty calls for a pay-as-you-go solution that allows the government to spend only as much money as it collects. The former governor is betting that the time of year will help his argument: with Spring comes an influx of tax revenue that would make it easier for the government to cover its expenses for a few months without adding to the debt. How much easier is anyone's guess, and would depend entirely upon whatever agreement Republicans strike with President Obama.

Pawlenty's is not a long term solution, however. It's akin to a stopgap measure that would buy elected officials time to do the work that really matters: reforming entitlement spending and make other cuts to the budget, all with the aim of pulling a U-turn at the debt ceiling instead of adding to the pile-up. 

In the Senate, Kentucky's Rand Paul has proposed that raising the debt ceiling be contingent upon passing a balanced budget rule, one that makes it illegal for the federal government to run deficits. In a way, Paul is suggesting that it's alright to raise the debt ceiling, so long as we make it impossible to do so ever again.

Whatever the differences between Paul's and Pawlenty's proposals, the Republican game plan for the debt ceiling debate is clear. House Budget Committee Chair Paul Ryan (R-WI) sums it up best:

The debt ceiling, obviously, is going to have to be increased if we’re not going to default, so the question is, what do we get in exchange for that? And what kind of fiscal controls?

Republicans are signalling that they will need to get concessions from Democrats if they want any hope of raising the ceiling—which has to be done, unless the President agrees to a Pawlenty-esque pay-go scheme, and that's highly unlikely. Viewed in this context, the GOP's 2012 budget, which was released last week, reads like a list of demands. In yet another game of Chicken, Democrats might be forced to pre-approve some of the entitlement reforms proposed by Rep. Ryan: the GOP will use the debt ceiling debate as a proxy to gain leverage in advance of the real debate about future spending.

The one thing that's for certain is that it's way too late to simply hit the brakes. The amount of spending we'd have to cut in order to avoid incurring any more debt is so massive that, according to the non-partisan Congressional Research Service, "the federal government would have to eliminate all spending on discretionary programs, cut nearly 70% of outlays for mandatory programs, increase revenue collection by nearly two-thirds, or take some combination of those actions in the second half of FY2011 (April through September 30, 2011)." Such measures, in addition to being politically untenable, would have a disastrous impact on our economic recovery.

The debt ceiling will eventually get raised, just as the 2011 budget eventually got passed. The drama will play out in how close we come to defaulting, though, and how much Democrats have to concede just to get what should be a given.

the federal government 
would have to eliminate all spending on discretionary programs, cut nearly 70% of outlays for 
mandatory programs, increase revenue collection by nearly two-thirds, or take some combination 
of those actions in the second half of FY2011(April through September 30, 2011) in order to 
avoid increasing the debt limit. Additional spending cuts and/or revenue increases would be 
required, under current policy, in FY2012 and beyond to avoid increasing the debt limit.

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Comments [3]

Sam

I thought this was supposed to be debt ceiling 101. Nothing I read here helped me understand the problem any better than everything else I've read on the topic. Very disappointing.

Jul. 30 2011 11:50 PM
Jack Jackson from Central New Jersey

>> "...the United States almost certainly maxes out its borrowing power, leaving the government unable to pay any of its obligations..."

Shouldn't this really be "...leaving the government unable to pay MANY of its obligations..."?

Certainly, the USG will still be collecting revenue and will have to make some very HARD choices but it cannot be the case that every current obligation of the government will go unpaid for. Just lots of them. And Congress will be tied up deciding how much to pay whom and when. The President will be right in using 14th Amendment authority to raise the debt ceiling. I think this is what Norquist and the Tea Party intended. Slow everything down to a crawl and steal as much as you can while the regulators are on furlough.

The next elections in November 2012 will be very interesting. If we make it that far...

Jul. 22 2011 01:55 PM
Richard from chicago

I think we should not raise the debt ceiling and let everything go to hell!!!!! Then we could eliminate the lobbyist and the corrupt politicians and start all over again. Maybe make this a socialistic government and try to become a member of the European Union. Think of the potential!!!

Apr. 18 2011 08:26 PM

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