Author: Dhruv Muralidhar, Graphics: Nina Tagliabue
The BRB Bottomline:
As Congress battles over raising the debt ceiling and its implications for the fiscal responsibility of the U.S. government, many Americans are unaware of what exactly a debt ceiling crisis entails, not only for the country but also for their wallets. This article examines the United States debt ceiling and delves into whether it truly is an obsolete relic.
After coming close to catastrophe earlier this month, Congress voted to raise the U.S. debt ceiling by $480 billion to allow the federal government to borrow enough money to fund its commitments through December of this year. The votes were mostly along party lines, with the House’s vote tally 219-206 and Senate’s at 50-48. President Biden signed the bill, officially averting a potential U.S. default for the time being. The victory is, however, short-lived as Senate Minority Leader Mitch McConnell’s promise to not help Democrats with the issue in December has opened the possibility of a financial meltdown before Christmas.
Despite the severity of this issue and its implications for the world economy, the public has remained largely apathetic. A recent poll from The Economist/YouGov found that 34% of adults were undecided about whether the debt ceiling should be raised. I hope to bridge this information gap by providing a baseline understanding of American debt, the purpose of the debt ceiling, and whether we should do away with it.
American Debt in a Nutshell
Why is Our National Debt So High?
The U.S. government loves to spend money. Whether it’s funding military interventions abroad, subsidizing various industries, expanding social safety programs, or embarking on infrastructure renovations, the government continues to spend trillions every year. And, since the government takes in less revenue than what these expenditures cost, it is forced to run a budget deficit: borrowing money to pay the difference. While almost every state government has to balance its yearly budget, the federal government has not had a balanced budget or budget surplus since 2001. All of this borrowing has added up over time, creating the $28.4 trillion problem we call the national debt. Presidents and Congresses of both parties have contributed to the mounting debt, in times of crisis by expanding government spending, and during times of relative economic prosperity by cutting corporate and income taxes.
Who Owns Our Debt?
When dealing with an amount of money this large, it is important that we know to whom our government owes money. There is a pervasive fear-mongering narrative that the federal government will eventually be politically beholden to China to avoid default because the Chinese own so much of our national debt. However, the real answer is more complicated.
In reality, close to 39% of the debt is held by the U.S. government itself through various agencies that invest in U.S. Treasuries as a way to increase their funding. Another 36% is held by state governments, corporations, banks, pension funds, and individual investors. A final 25% is held by foreign governments, with Japan leading the pack followed by China. Together, these two countries hold about 8% of the total debt. While China might make rumblings about dumping their share of the debt, they have yet to act on their perceived financial capital. Holding the debt allows the Chinese to keep the value of the dollar higher than the value of their own currencies, helping them keep their exports to the U.S. affordable and granting them a competitive advantage in trade. The Chinese are therefore unlikely to desire a doomsday recall on U.S. debt, something that would cause severe dollar depreciation and reduce demand for Chinese imports.
What are the Long-Term Effects of a High National Debt?
The answer to this question is not definitive. Economists are unsure of what consequences lie ahead, and there certainly is no academic consensus on the issue. Some say that as debt increases, so do the interest payments, restricting how much the government can spend on important programs. They also say that growing debt increases interest rates which, in turn, increases the chances of financial crises down the road. Others take a different view on the subject. They say that using borrowing to finance much-needed social safety and infrastructure projects is worth the potential destabilizing costs. Olivier Blanchard, the former chief economist for the International Monetary Fund, said that “large, stable governments should not be reluctant to borrow for socially and economically beneficial projects.”
Debt Ceiling: A Closer Look
What is the Debt Ceiling and what Purpose does it Serve?
Having a better grasp on why our national debt exists, we can now have an educated look at the debt ceiling. The debt ceiling, put simply, is a limit on how much the federal government can borrow to pay for its financial obligations. Raising the debt ceiling allows the government to borrow more money in order to pay for things like Social Security, Medicare, interest payments, and salaries for military service members. It is important to note that raising the debt ceiling does not authorize spending on future projects, but rather funds commitments already authorized by Congress and the President. So when Mitch McConnell claims the Democrats hold sole responsibility for raising the ceiling in the future due to their proposed spending packages, he is seriously misinformed. Raising the ceiling at this point would in fact be funding many of the Trump-era tax cuts and bipartisan coronavirus stimulus bills.
In theory, the debt ceiling is supposed to act as a tool for fiscal responsibility. By limiting how much the government can borrow, the ceiling should restrict how much the government spends, focusing on the programs that matter instead of useless spending boondoggles. While certainly a promising idea, this line of thinking runs into the issue of reality. Failing to raise the debt ceiling, as we’ll explore in the next section, would create a chain of events that would cripple the economy. As reported in the New York Times, when lawmakers are considering raising the debt ceiling, “the risk of an accidental default outweighs any fiscal responsibility that the debt ceiling encourages.”
What Would a U.S. Default Look Like?
Most experts agree that if the United States were to default on its financial commitments, the economy as we know it would crumble, potentially taking decades to recover. It sounds alarmist to say, but the repercussions of such an irresponsible action cannot be overstated. On a macro level, the U.S. dollar, backed by “the full faith and credit” of the federal government, would significantly depreciate, which is to say weaken. Stocks would spiral downwards, hurting not only Wall Street’s portfolios but also individual investors as well as the pension and retirement accounts that invest in the market. Interest rates would skyrocket, making it more expensive to start small businesses and take out loans to foster innovation. As a result, unemployment would rise, with some estimating the loss of 6 million jobs.
Beyond the disastrous effects to the economy as a whole, the effects of a default on average Americans are equally troubling. Social Security, Medicare, and Medicaid benefits would be delayed if delivered at all. Active service member salaries and veteran care would also be at risk. Even if someone does not rely on these programs or fall under those groups, the cost of living will increase to match the higher costs of investment. Rising interest rates will make home and auto loans more expensive. Mark Zandi, the chief economist at Moody’s Analytics, predicts that a default would result in the erasure of $15 trillion in household wealth. Companies would likely pass on their increased operational costs to the consumers, causing prices to rise across the board. As a result, it would take years for the American consumer and economy to regain a sense of normalcy.
Our Ways Out
What are Some Work-Arounds to the Debt Crisis?
If Congress continues to play politics with our collective economic future, other government institutions may be forced to bypass its authority to fix the issue. The Department of Treasury has already been doing so for the last few months. In her letter to Congress, Secretary of Treasury Janet Yellen said that the Treasury has been using “extraordinary measures” to finance the debt obligations after the debt ceiling was reinstated on August 1st. These measures include a complicated series of divestments and other financial maneuvers to grant more cash to the federal government. The effects of such “extraordinary measures” are short-lived, however, and cannot be used as a long-term solution.
Some have floated the idea of a trillion-dollar coin. According to legislation from 2001, the Department of Treasury, specifically the U.S. Mint, can create platinum coins of any value without the approval of Congress. Therefore, if we minted a platinum coin and had it be worth $1 trillion, the government could then deposit that coin and have the necessary funds to pay its debts. This is a short-term solution as well unless the Mint were to keep creating these coins every time we neared the debt ceiling. Some argue that this also sets a precedent for printing money to pay off debts, creating fears of inflation.
Another proposed solution is based on the legal theory that the President can unilaterally raise or ignore the debt ceiling. According to Section 4 of the 14th Amendment, “the validity of the public debt of the United States… shall not be questioned.” Some legal scholars argue that risking default by failing to raise the debt ceiling would be questioning the validity of the debt and is therefore unconstitutional. They argue that this grants the President the authority to ignore the debt ceiling or unilaterally raise it in order to protect the national debt as described in the Constitution. This theory has been supported by former President Bill Clinton who said that if he faced a potential default, he would use the 14th Amendment “without hesitation, and force the courts to stop [him].” This theory, of course, remains untested and could result in a long legal battle before being resolved one way or the other.
What About Eliminating the Debt Ceiling Altogether?
When all else fails and we risk a financial collapse every time the issue is brought up, the idea of just eliminating the debt ceiling is alluring. It may seem too simple to be true, but removing the debt ceiling is the completely plausible and arguably necessary step we need to take at this point. The American debt ceiling is an international oddity. Most comparable economies have no such measure in place, with the notable exception of Denmark who has its ceiling set so high that reaching it will not be an issue in the near future. There are growing calls from notable people in the political and financial spheres to eliminate the debt ceiling. Speaker of the House Nancy Pelosi called eliminating the debt ceiling “an excellent idea.” Calling the debt ceiling “destructive,” Secretary Yellen testified to Congress that she supported removing it altogether. Jamie Dimon, the CEO of JPMorgan Chase echoed this sentiment, saying that “we should get rid of the debt ceiling… we don’t need this kind of brinkmanship every year.”
At the end of the day, the issue is not whether you agree with increased government spending or the various programs that the federal government funds. It’s about whether we should risk financial calamity every year because Congress cannot decide if it wants to pay for things it has already authorized. As an editorial in the Baltimore Sun put it, refusing to raise the debt ceiling is the equivalent of throwing your credit card bill in the trash. The debt still exists and your creditors still expect payment, so ignoring the problem does nothing. You have already incurred the expense so you have to pay. Similarly, by the time the debt ceiling needs to be raised, the spending is a given; the choice is paying up or defaulting. And the latter is simply not a rational option.
A Final Word
It is irresponsible and careless for our elected officials to play a game of chicken when our country’s economic future lies in the balance. The American people deserve a better system that does not threaten to collapse every few years because some lawmakers want to pretend to stand for fiscal responsibility. Congressional Republicans are acting like the friend who orders a five-course meal when eating out in a group, and then “forgets” their wallet when the waiter brings the bill. If they truly cared about being responsible with our tax dollars, legislators should consider that before committing to spending on the legislation instead of making a fuss years later when the bills come due.
Because let’s be honest: a default hurts everyone, but who does it hurt the most? It’s not the millionaires in Congress or their billionaire donors; it’s the average Americans already struggling to recover from this pandemic. The debt ceiling is an antiquated tool and removing it would serve as removing one more weapon that the political elite can use to hurt the country with their unique mixture of incompetence and brinkmanship. We must eliminate the debt ceiling immediately for the sake of our economy, our country, and our future.
Take-Home Points:
- The American national debt is an accumulation of years of borrowing to finance budget deficits.
- The debt ceiling limits the amount the federal government can borrow in an effort to curb spending.
- Failing to raise the debt ceiling when necessary would result in the United States defaulting on its financial commitments.
- A U.S. default would have catastrophic effects on the economy and average Americans for years to come.
- There are a few ways to bypass the debt ceiling in the short-run, but ultimately eliminating it is the best course of action.