What is the Debt Ceiling and What Happens if We Don’t Raise it

By: Sid Spahn

Recently, a hot topic of discussion in the news is that of raising the debt limit for the U.S. government. But just what is the debt limit?

According to the U.S. Department of the Treasury, the debt limit is “the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments.” 

In simpler terms: the max amount of money the government can borrow to pay for pre-existing commitments that were already in our budget. 

Since August 1st, the Department of the Treasury has been using “extraordinary measures” to prevent the max limit being reached. However, by October 18th, those measures will not be enough to stop us from reaching it. We don’t know everything about how fast or hard reaching our debt limit would affect our economy. However, it won’t be good, especially right after COVID.

There are some definite effects that we do know about, though.

First, those government obligations we need the money for could be completely paused. This includes Social Security checks, advance Child Tax Credit monies, Medicare disbursements to health care providers, and payments to agencies, troops, state and local governments and contractors. 

The Treasury Department had a contingency plan published in the 2011 debt ceiling standoff that would make interest payments and prioritize avoiding default. Defaulting on our debt means we wouldn’t be able to make interest payments or pay back investors from the Treasury when their bonds mature, which would likely hit our credit rating. While a 2021 plan hasn’t been released, it would most likely be very similar.

Even with this plan, the government could be forced to default.

But the government wouldn’t be the only one struggling. Individually, buying a home, car or credit card could get more expensive. Stock prices could sink, threatening businesses and therefore our employment. This could trigger an economic recession, meaning millions of jobs lost, bumping our unemployment all the way up to 9%.

The most frustrating part is that this crisis is entirely man-made and a counterproductive decision made by our own congress.

So if there’s all of these problems, why won’t we raise the debt ceiling? It’s simple. The GOP is pushing this problem onto the Democrats, saying they should handle the debt ceiling on their own even though this debt was incurred by both parties. They would have to use a process called reconciliation which is essentially a way for Congress to enact legislation on taxes, spending, and the debt limit with only a 51-50 majority vote instead of the normal 60 votes needed. 

And it’s not like we haven’t raised the debt ceiling for both Democrats and Republicans in the past. Like in 2017, when Donald Trump was president, the Democrats continued to support suspending the debt ceiling for the Continuing Appropriations Act and the Supplemental Appropriations for Disaster Relief Requirements Act.

https://www.cato.org/blog/debt-ceiling-kabuki

As you can see above, the Obama-Trump spending pushed our debt to levels that we haven’t reached since World War II. This isn’t sustainable, and it’s going to get worse, especially without help from the GOP to raise the debt ceiling. 

So what’s going on in congress right now is more or less a political game of chess. Even though this is big in politics right now, it’s likely going to end with something being passed to lift the debt ceiling before it’s too late.

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