A month before COVID-19 lockdowns began in March 2020, the topic was all over the news, and Washington was talking about a potential crisis. Meanwhile, the rest of the country was living life: going to work, throwing Super Bowl parties, following the presidential primaries. Few were rushing to buy toilet paper.
It’s a similar dynamic now with the debt ceiling. It’s all anyone in the financial sector and Washington can talk about this week. Everyone else is either not paying attention or confused as to whether it’s a thing.
Treasury Secretary Janet Yellen warned Congressional leaders last week that the US would hit the debt limit on Thursday, and indeed it happened like clockwork around 10 a.m. While there’s some financial maneuvering Yellen can do for now, if political leaders don’t raise the debt ceiling by some time in June, the nation could default on its bills for the first time ever.
But few Americans really understand what it all means, much less how the looming debt limit crisis could plunge the country, and the world, into a depression — while making everything we buy more expensive.
So what is the debt ceiling issue all about, and why should you care? Let’s break it down.
What is the debt ceiling?
Simply put, the debt ceiling is the maximum amount of money the federal government is authorized to borrow to pay its bills. It used to be that when the level of national debt increased (even by a cent), Congress would have to allow the Treasury Department to increase the debt level to cover the country’s financial obligations. That got tedious. So more than a century ago Congress began passing a debt ceiling, setting a limit they hoped would not be reached.
Except that in recent decades the limit has been reached a lot. The combination of government spending and big tax cuts has ballooned the national debt to more than $31 trillion dollars. For context, the debt was around $21 trillion in 2018.
In their zeal to cut spending in certain areas, the GOP decided to turn raising the debt ceiling, a routine order of business, into a political negotiation point.
In 2011, the political standoff dragged on so long that America was on the brink of default until, at the last moment, a deal was reached by Congressional Republicans and then-President Obama. Republicans wanted spending cuts in exchange for voting to raise the debt ceiling. No real progress was made on those cuts, and the only lasting impact was a downgrade to America’s credit rating for the first time in history, making the national debt even more expensive to pay off.
So does refusing to raise the ceiling debt help lower the national debt?
No. The debt ceiling is about paying for things the country has already bought. Think of it this way: You put a vacation on a credit card years ago, and you’re still paying it off. Financing it that way means you might pay double the original cost. You may not like it, but you took the trip and you have to pay for it.
Why is this a big deal now?
For the first time since the Obama era, there’s a Republican majority in the House, a Democratic president, and a looming debt ceiling problem. The country hit the debt ceiling on Thursday, just as Yellen said we would. If the debt ceiling isn’t increased by the June deadline, the economic impacts could be catastrophic.
But instead of passing a debt ceiling increase, conservatives are demanding that House Speaker Kevin McCarthy agree that there must be spending cuts as part of any deal. Democrats, who control the Senate and the White House, say they aren’t in the mood to negotiate over the debt ceiling.
It’s unclear which side will blink.
Who cares if the debt ceiling isn’t raised?
Everyone. You, your parents, your kids, people in far-flung corners of the world. The country has never defaulted on its bills, so no one is exactly sure what would happen. But if the debt ceiling isn’t raised, and America suddenly stops paying its bills, all kinds of things would be affected — like Social Security checks, Medicaid and Medicare payments, and salaries for American troops.
Back in 2011, interest rates for mortgages and student loans spiked even when America hovered on the brink of default. Likely that would happen again but much worse. Investors in financial markets don’t like uncertainty, nor do businesses or everyday consumers. The upheaval would likely thrust the US into recession. And given the country’s impact on global markets, if our economy tanks, so does the rest of the world.
Could a default happen?
Smart people on Wall Street think it could. Bank of American analysts say it’s “likely” to happen. And structurally, getting the votes to raise the debt ceiling is going to be very tough, especially from the most conservative House Republicans.
Can anything be done?
Of course. This is the definition of a manufactured crisis.
There are three paths out of this mess: First, Democrats could find places to trim spending and see if House Republicans agree. Second, Democrats could do nothing except demand that the debt ceiling is lifted and see if Republicans back down at the last minute, as they did in 2011.
Third, there’s a method by which Democrats and a handful of moderate Republicans could force a vote on the House (and end-run Speaker McCarthy). It’s called a discharge petition, and logistically it takes months to do, meaning if that is to happen, someone must start the process soon.