The US debt ceiling: everything you need to know

WASHINGTON – As Congress continues to flirt with the idea of ​​not raising or suspending the country’s debt limit, economists and academics are once again questioning whether creative loopholes like a trillion dollar coin or l invocation of the 14th Amendment could help the United States avoid self-inflicted economic calamity.

Republicans and Democrats disagree on the responsibility of raising the country’s borrowing limit. Democrats are insisting this be done on a bipartisan basis, reflecting the fact that both sides have incurred large debts in recent years. Republicans, who voted to suspend the debt ceiling when President Donald J. Trump was in power, now say they don’t need to help because Democrats control all levers of power in Washington and they are preparing to spend trillions of dollars in new spending by themselves.

All of this drama begs the question of what the debt limit really is, how it got here, and why the United States does not completely remove the debt limit and spare the nation its periodic confrontation with a economic time bomb.

The debt limit is a cap on the total amount of money the federal government is allowed to borrow to meet its financial obligations. Because the United States has budget deficits – meaning it spends more than it earns on taxes and other income – it has to borrow huge sums of money to pay its bills. This includes the financing of social protection programs, interest on the national debt and the salaries of troops. While the debt ceiling debate often sparks calls from lawmakers to cut government spending, lifting the debt ceiling doesn’t authorize any new spending and in fact simply allows the United States to fund existing obligations.

Technically, the United States hit its debt limit in late July, following a two-year extension that Congress accepted in 2019. Treasury Secretary Janet L. Yellen has since used “extraordinary measures.” to delay a fault. They are essentially tax accounting tools that hold back some government investments to keep bills paid.

The Bipartisan Policy Center estimates that the Treasury will be seriously short of liquidity between October 15 and November 4. However, it is more difficult to project the so-called “date X” due to all the pandemic relief money the government is handing out and the uncertainty surrounding the amount of tax revenue to come this fall.

The national debt now stands at $ 28.43 trillion, according to the Peter G. Peterson Foundation’s live tracker. Currently, the borrowing limit is set at $ 28.4 trillion, leaving the federal government little room for maneuver.

To give an idea of ​​the size of such a deficit, the whole of the American gross domestic product was $ 20.93 trillion last year.

According to the Constitution, Congress must authorize borrowing. The debt limit was instituted at the start of the 20th century, so the Treasury did not need to ask for permission every time it needed to issue bonds to pay bills. The first debt limit came under the Second Liberty Bond Act of 1917, according to the Congressional Research Service. A general limit on the federal debt was imposed in 1939.

Denmark also has a debt limit, but it is set at such a high level that increasing it is usually not a problem. Most other countries don’t. In Poland, public debt cannot exceed 60% of gross domestic product.

For many years raising the debt ceiling was routine. But as the political environment has become polarized, the escalation of the debt ceiling has intensified. The house employed the “Gephardt rule”, which required raising the debt ceiling when adopting a budget resolution, but which was mostly phased out during the 1990s.

During the debt ceiling battle in 2011, some argued that President Barack Obama had the power to unilaterally lift the debt ceiling. Former President Bill Clinton said at the time that if he was still in office he would invoke the 14th Amendment, which says the validity of the US debt is not to be questioned, raise the debt ceiling alone and force the courts to stop it.

Mr. Obama and his lawyers disagreed and opted against this approach. After leaving office, Obama admitted that he and Treasury officials had considered several creative contingency plans, such as minting a $ 1 trillion coin to pay off part of the national debt. In a 2017 interview, he described the idea as “wacky.”

Ms Yellen rejected the idea of ​​striking such a coin to deal with the debt limit at a House Financial Services hearing, arguing that the only way to settle the borrowing limit is for Congress to lift it or suspend it.

The lack of a replacement is one of the main reasons for maintaining the debt ceiling. The United States could follow Denmark’s model and raise the debt ceiling to a stratospheric level. Some have also suggested that it might also force the limit to gradually increase with new funding.

Few lawmakers in either party benefit from a debt ceiling vote, and default that would be caused by failure to raise it would lead to economic disaster. With political polarization in the United States showing no signs of slowing down, it often seems that the risk of accidental default outweighs any fiscal responsibility encouraged by the debt ceiling.

Ms Yellen said last week that she would support legislation to abolish the debt limit, which she called “destructive”.

“I think when Congress makes spending laws and puts in place a tax policy that determines taxes, those are the critical decisions Congress makes,” Ms. Yellen said. “And if in order to finance these tax expenditures and decisions it is necessary to issue additional debt, I think it is very destructive to put the president and myself, as secretary of the treasury, in a situation where we may be unable to pay the resulting bills. these past decisions.

However, it would take an act of Congress to remove the debt limit, and finding a deal is never easy.

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