House Republicans signaled they will vote on a three-month hike to the nation’s debt ceiling sometime this week. For those still curious, here’s your primer on the debt ceiling.
When will we hit the debt ceiling?
We already kind of hit the debt ceiling, except the Treasury Department has pulled some accounting gimmicks to push it back a few months. The current estimate is we’ll hit it around mid-February.
What is the debt ceiling?
This is a law that caps how much debt the federal government can accrue. The current cap is $16.4 trillion. Congress authorizes spending, the government collects revenue, and if that spending is greater than the revenue, then the government issues debt to make up for the difference. The difference between revenue and spending is that year’s budget deficit. The national debt is the sum of all those annual deficits. The debt is in the form of United States Treasury securities, which the Treasury department sells to investors. Your grandparents might have bought you a Treasury bond when you were younger, which is a type of Treasury security. Basically, they loaned the government money, and the government will pay them (or you) back, plus interest.
Why do we have a debt ceiling anyway?
For the half of our nation’s history, the federal government was very small and didn’t have to borrow a lot of money. When it did spend more than it took in, Congress approved every security issued by the government to cover that debt. Congress even set the terms of each security, such as the duration and interest rate. However, with the onset of World War I, Congress realized that the country would need to issue a lot of debt to pay for the war. It was not practical for Congress to approve every security, so they delegated that to the Treasury Department. In order to maintain some control and limit excessive borrowing, Congress created the debt ceiling.
If this debt ceiling business is such a big deal, we must not raise it often, right?
The debt ceiling has been raised over a 100 times since 1940. These votes have sometimes been partisan, especially in recent years, although the seeming willingness of some Republicans to actually hit the debt ceiling, and cause all the bad things that go along with that, is new. To be fair, then-Senator Obama voted against raising the debt ceiling when George W. Bush was president.
What are those bad things that might happen if we reach the debt ceiling?
As Matt Yglesias at Slate writes: “Nobody knows—and that’s exactly what’s so terrifying about it.” The biggest fear is that the US will no longer be able to pay the holders of its debt securities; in essence, we will default on our debt. Not only will this hurt our credit rating (which was already downgraded by Standard & Poor’s when we almost hit the ceiling in 2011), but it would damage the fragile economic recovery and impact the world economy. US debt is considered a safe investment by investors all over the world. So safe that at one point investors we paying negative interest rates on Treasury securities – basically paying the government for the privilege of lending the government money. Calling into question the safety of US debt is a bad idea.
Couldn’t we just keep paying off bondholders to avoid defaulting, and cut spending other places?
Some Republicans have argued for this plan, which states that hitting the debt ceiling isn’t too bad because we could just prioritize the service of the national debt, keep our credit worthiness intact, and not pay other bills. However, the Treasury Department has said it is not equipped, and not willing, to make choices about which bills to pay. Instead it will slow all payments to a crawl.
Whatever, like most political crises this won’t really affect me, right?
Maybe, maybe not. If the national economy drops back into recession because of the uncertainty surrounding the debt ceiling, then we will all be affected. If you’re on Social Security and the government is unable to send your check on time, or if the government won’t reimburse your Medicare doctor, or if you’re flying and air traffic controllers aren’t getting paid, you might be affected. Plus, as Matt Yglesias notes, the ripple effect of these late or canceled government payments might affect businesses and individuals throughout the country.
I’m still confused – debt is bad so why should we raise the debt ceiling?
Remember that increasing the debt ceiling is not about authorizing new spending. Congress appropriates money; basically it tells the president how much to spend and where to spend it (like all bills these appropriations must be signed by the president). So Congress has told President Obama how much to spend, the Treasury needs to borrow money to cover some of that spending, but Congress won’t let it borrow any more money. Some scholars have argued that this puts the president in a constitutional quandary, because he is required to follow the law and spend the money Congress has appropriated, but he is also required to abide by the debt ceiling. Presidents aren’t suppose circumvent Congress and pick and chose what money is spent and which bills are paid, which is why the Treasury is hesitant to do this.
So it seems like the debt ceiling crisis in a manufactured crisis, doesn’t it?
Yes. Congress could vote to raise the debt ceiling and this would all be over and we would not default. Or it could abolish the debt ceiling forever, and this would never happen again.
Why do some Republicans want to hit the debt ceiling?
Because they want to force spending cuts. Republicans have a point here, because entitlement spending will eventually have to be reined in, and very few politicians are willing to have a serious discussion about these cuts. However, Republicans are reluctant to name what cuts they would make if given the chance. In general, Americans don’t like the idea of government debt, but like all the costly programs and benefits they receive from the government. And large-scale spending cuts will have to come from entitlement programs like Medicare and Social Security, and no one wants to upset the powerful senior lobby.
Weren’t there some spending cuts that were suppose to go into effect January 1st?
This was the so-called “sequester,” which was a series of automatic cuts that Congress put in place after the last debt ceiling crisis. These draconian cuts were to defense and entitlement spending, and the hope was that Congress would find a way to reach a more bipartisan spending deal before the sequester. They didn’t reach a deal, and punted the date of the sequester back to March 1st.
Shouldn’t we fight about spending during the budget process?
Probably, but we haven’t had a federal budget since 2009 (or 1997, if you want to be technical about it). The government is funding through “continuing resolutions” that set spending levels for a few months going forward. The next resolution runs out at the end of March. In addition, many programs like Social Security and Medicare operate on autopilot, and are not part of the normal budget process. Republicans have signaled that as part of temporarily raising the debt ceiling, they would mandate that Congress pass a budget. If Congress did not pass a budget, they would not be paid. We’re still waiting to see if the Democrats will agree to these stipulations.
What can the president do about this?
President Obama has vowed not to negotiate with Congress about the debt ceiling, although Congressional action is needed to raise the ceiling. There has been some talk about minting a $1 trillion platinum coin, because an obscure law about commemorative coins lets the Treasury mint such a coin in any denomination. The Treasury could then deposit that coin into its account at the Federal Reserve and spend that money to pay its bills. Others (including Bill Clinton) have suggested that the 14th Amendment, which states that “The validity of the public debt of the United States…shall not be questioned” means President Obama can ignore the debt ceiling as unconstitutional. As discussed earlier, the fact that Congress passed laws requiring a certain level of spending, and then won’t increase the debt ceiling to accommodate that spending, means the president is forced to violate one law or another. He could choose to violate the debt ceiling as the lesser of two evils.
What does this debt ceiling fight tell us about politics today?
That things can only get done because of manufactured crises, and that even the things that get don’t aren’t very impressive. It also shows that the Republican party, or at least an influential part of the party, is so set against current levels of federal spending that they’re willing to risk defaulting on the national debt to force the issue. Republicans like to complain about the “uncertainty” caused by shifting government regulations and taxes, but by prolonging the debt ceiling crisis they are creating a dangerous amount of uncertainty. Yes, a long-term budget agreement is needed to put the country on firm fiscal footing. But this is not the way to hold that debate.
The debt-ceiling law is an anachronism from 1917. It was essentially a move of the banks to prevent Treasury from issuing Treasury Notes as opposed to Federal Reserve Notes. The banks wanted interest on those loans to the government. We were on gold backing for our dollars then. In 1971 we went off the gold backing. Not enough gold available to create new money backed by it. Our economy was outgrowing its gold supply. We were fighting the Viet-Nam war then and the War on Poverty and creating the Great Society. President Nixon (R) closed the gold window. Very little else was changed. Little discussion of what it all meant occurred. But now and then we see these laws made back when the dollar was backed by this or that commodity coming into play. And they are anachronisms. They no longer concern reality.
When the Fed buys a mature security from a bank (which got it when the bank lent money to Treasury for deficit spending), it buys with new money it creates out of thin air. The bank gives up the security to the Fed in return for the Fed crediting the value of the security to the bank’s reserves. That redeems the debt to the banks. No bank now holds the security except the government bank, the Fed. But it is a government entity. It is an agency of the United States, however independent it may be otherwise. The government does not owe itself for its debts. And this is what it would look like for a government debt to be paid off: government entity buys security with money it creates out of nothing (government power delegated to it by Congress and based on Article I Sec. 8 of the Constitution). This is fiat money, money by government decree. But the point is that the banks don’t hold the security once the Fed possesses them. That debt is gone. And the government doesn’t owe itself for its debts cleared by government credit. So the mature securities at the Fed are not really debts to anyone. And the new securities obtained by swapping mature securities for new ones, as yet are not debts to anyone out of the government. They will later become debts when the Fed sells them to banks to drain their reserves during inflations. That constrains the lending by the banks. Until then, they are not debt.
And as for the money the Treasury got for deficit spending, that money is now pure credit, since the banks no longer have a claim on it once the Fed has bought their securities. It is as if the Fed gave the money directly to the Treasury (which it can’t do by law), but it is an immaculate injection of new money by the Fed, if you consider that the money it gave the banks for the security could be shown to be fungibily equivalent to the deficit spending money.
If John borrows $95 from Joe in return for a promise to be paid back $100 at a future date and when that date arrives and John’s brother Bill buys the IOU back for John with new $100, Bill created or won at the races in England, there is now more money in the American economy then before. It would be the same as if Bill gave John the $95 to begin with and $5 to Joe for being such a good buddy.
Maybe the Fed doesn’t want the fact that it buys up these debts with money it creates, because some idiots in Congress may think they can turn off this source of debt-free new money for government by denying the Fed’s ability to buy securities with new money. This would be a disaster, and lead our country into a tailspin because less and less money would be available as it leaves the country in buying goods imported from China and other Asian countries, by the 1% taking it out of the country in savings accounts in the Cayman Islands, and people just cutting way back on spending to conserve what they already saved. You like depressions? You would get it with that.