WASHINGTON — The U.S. government on Thursday reached its borrowing limit of $31.4 trillion, and now a fractious Congress is faced with coming up with a plan to raise the debt ceiling if it wants to prevent a disastrous default.
Lifting the cap on how much money the United States can borrow does not authorize any new spending and simply allows the United States to finance existing obligations. It has been done many times with little fanfare, but lawmakers have demanded cuts in spending before increasing the nation’s borrowing authority.
With a divided Congress and a renaissance of fiscal conservatism in the GOP-led House of Representatives, a bitter and dangerous political battle over the debt ceiling is looming.
Why is the nation more than $31 trillion in debt and to whom?
The nation is in debt because it spends more than it raises in taxes or other revenues. The national debt has increased regularly every year for decades, spiking at times when the nation was forced to sharply increase spending (like during World War II and whenever the U.S. economy falls into recession).
The debt increased dramatically recently due to the Trump and Biden administrations’ responses to the COVID-19 crisis, which resulted in unprecedented federal spending to try to keep the U.S. economy afloat.
The debt is a result of U.S. borrowing through the sale of U.S. Treasury bonds across the globe. The federal government uses the money raised through these bond sales to pay financial obligations and interest on the national debt. Due to the global market for these Treasury bonds, a default “would have very serious consequences for the financial systems around the world,” said University of Minnesota economics professor V.V. Chari.
If the debt limit was reached this week, why isn’t the federal government in default?
The U.S. is not in default and won’t be for months, because Treasury Secretary Janet Yellen has resorted to “extraordinary measures” to keep paying the nation’s bills. In a letter to Congress, Yellen listed two measures that will begin this month to prevent the government from defaulting.
One is to temporarily halt payments to retirement, disability and health benefit funds for federal employees. The other is to suspend the reinvestment of maturing government bonds for federal employees who hold these bonds in retirement accounts.
Yellen has other “extraordinary measures” at her disposal. But when those measures are exhausted, the federal government would reach the “X date” and default on its obligations. That date is expected sometime in early June.
What happens if the United States defaults on is obligations?
Since it hasn’t happened before, no one knows. But economists and Wall Street analysts say a default would be economically devastating and could plunge the globe into a financial crisis. They say that a default of the United States would cause markets to crash, businesses to fold and millions of job losses.
“This should be unthinkable for any policymaker,” Chari said.
The last time there was extreme brinksmanship over the raising of the debt ceiling, during the Obama administration, the credit rating of the United States was downgraded. But the debt limit was raised before default when a deal was reached to impose spending limits on both domestic programs and the military. The nation’s triple-A credit rating was eventually restored.
What are the political and partisan differences over raising the debt limit?
President Biden and Democratic leaders in Congress say the debt ceiling should be raised without conditions and negotiations over spending be made separately.
But to help win over 20 hard-line GOP House members opposed to his speakership, Rep. Kevin McCarthy, R-Calif., made concessions over the debt limit. McCarthy agreed that the debt limit would not be raised unless Congress slashes $130 billion in federal spending next year or implements broader fiscal reforms, which could affect popular entitlement programs like Medicare and Social Security.
Right now, both sides are dug in, something Chari said could lead to “chaos.” He also said the political brinkmanship is not new.
“We’ve been to this dance before in the past 30 years,” Chari said.
The economist also said he expected there will eventually be a deal. One scenario has Senate Minority Leader Mitch McConnell, R-Ky., negotiating a debt ceiling agreement with the White House and congressional Democratic leaders – which would freeze out McCarthy.
“Sensible people will find a way out of this,” Chari said.
What do Minnesota lawmakers think Congress should do?
Minnesota’s Democratic lawmakers are bashing House Republicans for demanding concessions to raise the debt limit – but some seemed open to a bipartisan deal. The offices of the state’s Republican members did not respond to requests for comment.
“Defaulting on the debt would mean higher costs for Americans on their car loans, mortgages and credit cards – and it would put Social Security payments in jeopardy,” said Rep. Angie Craig, D-2nd District. “That is simply not an option. I am fully committed to working in a bipartisan way to address the debt limit and urging my colleagues on both sides of the aisle to do the same.”
Rep. Betty McCollum, D-4th District, expected to remain a senior member of the House Appropriations Committee in the new Congress, said, “Allowing the U.S. to default would be a disaster for our economy and for Minnesota families.”
“Let’s be clear: lifting the debt ceiling is about paying for past obligations, not about future spending as Republicans would like people to believe,” McCollum said. “They must stop playing political games with America’s full faith and credit.”
Meanwhile, a spokesman for Sen. Amy Klobuchar, D-Minn., said the senator “believes the debt ceiling should be raised on a bipartisan basis like it has in the past, including under President Trump. This is about making sure our bills are paid and our economy doesn’t fall into a downward spiral.”
And Sen. Tina Smith, D-Minn., was more blunt in the need to raise the debt ceiling “or else crash the economy.”
“Republicans are holding our economy hostage so they can once again attempt to slash Social Security and Medicare, which they have proudly said is their agenda,” Smith said. “We should absolutely raise the debt ceiling. In fact, I think we should abolish the debt ceiling limit altogether so we don’t have to play this ridiculous game that MAGA Republicans seem to relish.”
Is it constitutional for America to default on its debt?
Something to understand by the way is that we owe the debt, not the government. If government shuts down and Congress dissolves, we still owe the money.
There’s a Supreme Court case law that holds that the government cannot simply repudiate its contractual obligations. That would be a “taking” without just compensation. I do question whether the “debt limit” is constitutional. There’s a maxim which I’ve read in older Supreme Court decisions that a legislative body cannot bind the hands of subsequent legislative bodies. It’s one thing to default on contractual obligations. It’s another thing to try to enforce a century old “law” that says you have make that choice.
We don’t know, since it hasn’t been tested before.
It’s a compelling view, I think, that the 14th amendment, which obliges Congress not to forfeit the credit of the US Gov’t, does make the debt ceiling unconstitutional.
But how do you test that? I suppose the admin could state such an opinion & direct Treasury to continue selling bonds beyond the debt limit. Then it’s up to someone to sue, to stop the sales of those bonds & the ball’s in SCOTUS’ court…
Exactly. And then refuse to comply with any Court ruling against the executive if it relied on the votes of the three democratically-illegitimate Trump/McConnell appointees.
In any event, Biden needs to take this irresponsible and reckless strategy away from our “conservative” nihilists for good. They’ve pulled this one too many times now.
This is all political theatre. The interest on the debt is the first thing to be paid. The government is then run on the money that’s left over. The debate becomes, who gets what. The budget should be publicly prioritized, with constitutional requirements paid for first.
The Constitution requires the Executive to implement the laws passed by Congress. In other words, all the spending is constitutionally required.
Yes, one would have to say that interest on issued bonds must be paid; the issue is whether preventing the government from honoring other obligations puts the “validity of the public debt…[in] question”. The XIV Amendment does not just speak of interest on bonds, but includes other governmental “payments”.
And it’s hardly “political theatre” when the nihilist House Repubs expressly want to force the government into defaulting on some obligations, as you yourself are advocating. Someone not getting their contractual or statutory transfer payment when due likely won’t deem the failure mere “theatre”…
Cut spending!! When you hit your spending limit, you have decisions to make. Evidently cutting spending is not one of them. This has to stop. We are nearly 32 TRILLION in debt and pulling back on spending is a must. Both parties are guilty and only a few GOP lawmakers seem to care. Unbelievably Pelosi got credit for doling out tax dollars in pork spending omnibus bills, “she kept her fellow Dems in order”, I was told….. If giving away someone else’s money (tax dollars) is honorable, I disagree!
As of 2020, 70% of the federal budget went to Social Security, Medicare, and veterans programs. 5% went to interest. The remaining 25% is everything else, including the huge defense budget. (Source: https://www.gao.gov/federal-budgeting).
Which spending cuts do you have in mind, Joe?
Erik, off of the top of my head, 85 billion left in Afghanistan, 65 billion in fraud payment from COViD PPP, every dollar spent on a failing public school system (should be local spending), NATO spending, UN spending, giving hundreds of millions to countries that hate us, CDC and NIH ridiculous budgets (they really answered the bell with COViD)….. The list is so long I don’t have time to finish it. Bottom line is the spending is out of control by Lawmakers in DC. Pork payouts to buy votes with taxpayer dollars is not right, period. If American taxpayers actually believe our Federal budgets are legit, we are lost!!!
Some of those things you listed are past spending. You need to cut future spending, not past spending. Other things you mentioned are “hundreds of millions” with respect to a $1.2T deficit or 0.01% of the deficit.
That doesn’t move the needle. If spending cuts are so important you need to put some skin in the game. Suggest something that benefits you directly to cut.
I disagree completely with defunding NATO. Russia would eventually invade Poland.
Thanks for pointing all that out. If you look at Congress, they haven’t gotten an more detailed than Joe here. You’d think their voters would be up in arms that they don’t have any real plans about what to cut; just threats to wreck the economy over the debt ceiling without any idea what they really want. It’s kindof like the McCarthy speakership vote, where he kept giving them what they asked for & they still wouldn’t vote for him. The lesson for the rest of us: don’t negotiate with hostage takers.
This is not the spending limit. It is the limit to borrow for debt already incurred.
Why does that very basic point need to be reiterated every time the Republicans pull this kind of nonsense?
RB, you don’t have to borrow if you do not go over the amount of money you have to spend. Everybody knows the debt ceiling is about borrowing and how much but BEFORE you borrow you spend too much. There is no 2 in the equation if you stop at 1….
It is apparent in the Smith household when a spending problem occurs the solution can be found by not paying the bills.
Very convenient…
It’s Trumpism at home!
No Edward you actually stop spending before you hit your income level. You actually bank a percentage of your income for a rainy day. It may require not getting everything your heart desires but you don’t have to borrow. It requires a bit of control, unfortunately for taxpayers there is no spending control in DC Again not that difficult.
Most of the “lack of money” was the Trump tax cuts. We decided to give money to rich people rather than use it to pay our bills.
So, no home loan, no car loan, no debt of any consequence?
I’m all for a balanced budget amendment: Just include the automatic tax increases to cover all the stuff our diverse citizenry has declared a responsibility of government and passed into law by our duly elected officials: Mostly the Republican ones whose time in power has always resulted in deficit and debt increases beyond that of their frugal Democratic colleagues.
Joe we agree, start by cutting the spending, all of it, S/S, medicare, military, farm, etc. etc. etc. in all those districts that don’t pay their fair share of taxes, tax takers vs tax payers, when the gozintas=the gozoutas, then the folks districts that want to reduce the spending, voting against raising the debt ceiling, since they want to reduce it, they should all be happy to belly up to the bar and be first in line. Suspect we’ll be pretty close to balanced by then.
Yes let’s cut spending. Let’s cut spending on big oil subsidies, big pharma subsidies, big ag subsidies, the big dark hole for money known as the Pentagon. Plenty of areas to cut trillions in spending without cutting programs that actually help people who need it.
There is no threat to the debt ceiling not being raised. All the Democrats are for it and only about 6 Republicans need to be persuaded to raise the ceiling and move on. While the Democrats march in lockstep, the Republicans have plenty of factions to choose from.
Yes indeed, Dems “march in lockstep” on the most basic principle of responsible government, paying its monetary obligations in a timely fashion.
But as you say, not the Repubs, unfortunately. For them, nihilism is an actual “faction”. And we’ll soon see which faction controls that party!
I’m not sure that the Democrats (who have been ringing up the $32 trillion dollar national debt) exemplify “responsible government”, but it is unlikely that any will break ranks from what they are told to do and at least pretending to pay for some of the spending looks better than trying to slow down government spending.
Trump and the (R) controlled congress increased the debt by $7.6T by 2022. I know we all live in media bubbles these days but surely you must know by now neither party is afraid of deficit spending.
Wasn’t it (R) Dick Cheney who said the quiet part out loud? “Deficits don’t matter”. History has proven him correct.
Cites please. Obviously not the Seventh Circle.
It is a bit more complicated than that. It is not so much that Democrats march in lockstep on debt limits as it is that they all agree on the matter. Their position is helped by the fact that on this issue, they are right, something that even in these decadent times, carries some weight. On the other hand, marching in lockstep is a metaphor that can be aptly applied to Republicans. Many, even most Republicans in Congress, understand that holding the government hostage is wrong. They do it because party discipline requires it, and they fear primary challenges if they don’t do it.
Everybody has their perspective, and from my perspective as a Democrat, I get frustrated that by and large Democrats don’t march in lockstep as much as I would like them to. We are a fractious lot, sometimes excessively so.
It’s not quite that simple. Because Repubs are in the majority, they control what comes to the floor for a vote. So while there might be votes to adjust – or even eliminate – the debt ceiling, without a bill to vote on, it’s a moot point.
And even if there were a bill, I suspect the vote might be trickier than you imply. Who are the 6 Republicans who will break ranks with their party to vote with Dems? Whomever does will surely be faced with a primary challenge from the right. That threat is more than powerful enough to prevent any defectors – even those who know it’s the right thing to do.
The money has already been spent. When the credit card companies call and ask me to pay the money I have spent, the answer “I am sorry, I have hit my spending limit” is not a response that they will accept. The only way to reduce spending is to spend less.
Maybe if we taxed billionaires more than 750 dollars a year, the debt limitation issues we face now wouldn’t be quite as bad.
How do billionaires avoid the sales tax? Or property tax? Or wheelage tax? Or…
Billionaires make a million times as much as I do but they don’t buy a million times as much stuff. They don’t have a million houses or a million cars.
One has to wonder where all the deficit hawks were when Trump irresponsibly cut taxes for the wealthy. I recall that Dems pointed out it would baloon the deficit & debt, but Repubs moved forward without a second thought.
How do billionaires avoid the sales tax?
One way is to buy clothes in Minnesota instead of Florida. Many rich people have modest lifestyles, one factor in their getting rich. I actually have a rule on this. We tax two kinds of people. We tax the politically weak like smokers and people who can’t afford to hire lobbyists. And we tax those who are easy to tax, like people who own houses or buy things in stores. The rich often don’t fall in either of these categories in significant ways.