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Why the Debt Ceiling Is Always Up for Debate

·5 min read
Douglas Rissing / iStock.com
Douglas Rissing / iStock.com

The debt ceiling is an economic and political peculiarity that’s almost exclusively unique to the United States. Poland has something similar, according to The New York Times, and Denmark technically has a debt ceiling, but it’s so high that raising it is never an issue the way it is in America.

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And boy, is it an issue in America.

The U.S. has never defaulted on its debt obligations, but it has come close a few times in high-stakes games of political chicken that now occur so frequently they’ve come to be expected. Both parties are currently spinning their sides after narrowly averting a government shutdown with a band-aid fix that kicks the can down the road until December.

So, what does it all mean and why does the country always seem to keep circling back to the same argument?

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What Is the Debt Ceiling?

The United States runs budget deficits, which means the government spends more money than it collects in tax revenue. In order to pay its bills — things like Social Security payments and salaries for military personnel — the government borrows enormous sums of money by issuing Treasury bills and bonds.

The national debt is now $28.86 trillion. For context, the U.S. GDP — the entire combined economic output of the richest country in the world — is less than $21 trillion. Knowing that, it might be hard to believe that there’s a limit as to how much the government can borrow. But there is.

That limit is known as the debt ceiling.

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Why Is There a Limit and Who Sets It?

The Constitution declares that all federal borrowing must be authorized by Congress. In the early 20th century, debt limits were introduced so the Treasury could issue bonds without getting permission from Congress every time it had to spend money.

The solution was for Congress to cap the amount that the government could borrow and then periodically revise that cap as future borrowing requirements grew.

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Why Are Debt Ceiling Politics So Heated?

Raising the debt limit used to be a routine part of standard, nuts-and-bolts government operations, according to The New York Times. Then, in 1976, Gerald Ford triggered the first partial government shutdown when he vetoed a spending bill over a budget disagreement, according to NPR.

It was the first of many. There would be five partial shutdowns during President Jimmy Carter’s term and eight during President Ronald Reagan’s administration. But they were much narrower in scope and far less heated than the political gladiator battles that surround today’s debt ceiling talks.

Everything changed in 1995-96 when the GOP-controlled Congress forced a painful, 21-day government shutdown — the longest in history — during an ideological showdown with President Bill Clinton.

According to NPR, the politically unpopular move backfired so badly that there wasn’t another shutdown until the 2010s. Shutdowns are political grenades that almost always explode in the hands of whichever side forces one as leverage. The Republicans were reminded of this when a shutdown over Obamacare backfired. The Democrats swallowed the same pill when they were defeated after forcing a shutdown over DACA legislation.

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Shutdowns Are Frustrating and Destructive

The reason that debt ceiling politics are so unpopular is that government shutdowns have real consequences that real Americans feel in real life. According to the Committee for a Responsible Budget, this is what happens when a country stops funding its government:

  • National parks close. During the 2013 shutdown, a half-billion dollars were lost when millions of people were turned away from America’s more than 400 national parks and monuments.

  • Air travel can be disrupted, as it was in 2018-19 when air traffic controllers and TSA agents were forced to work without pay during a shutdown.

  • Environmental Protection Agency (EPA) site inspections and Food and Drug Administration (FDA) food inspections grind to a halt, as they did in 2013 and 2018-19.

  • Social Security recipients still get checks and Medicare recipients can still go to the doctor, but much administrative work stops. In 1995-96, more than 10,000 Medicare applicants were turned away every single day of the shutdown.

  • The IRS suspends many services, including things like processing transcript requests. In 2013, applications for mortgages and other loans were delayed by a backlog of more than 1 million IRS document requests.

  • Benefits from public assistance programs like SNAP and TANF — although their funding is mandatory — are often delayed during shutdowns because the organizations that process and distribute them are affected.

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But Default Would Bring Catastrophe

During shutdowns, emergency actions are taken to prevent the government from going into default, which it will if it fails to make interest payments on the money it has already borrowed. If that happens, inconveniences will be the least of the country’s problems.

Treasury Secretary Janet Yellen recently told ABC that “a failure to raise the debt ceiling would probably cause a recession, and could even result in a financial crisis … It would be a catastrophe.”

A report from Moody’s Analytics backs that assertion, estimating that defaulting on the national debt would wipe out $15 trillion in household wealth and cost 6 million American jobs. The report predicts a stock market crash, severely tightened credit markets, more expensive business lending and higher credit card interest rates. There’s also the little thing of the United States being revealed as a deadbeat nation to a watching world.

The government avoided that calamity this go-around, but it will have another chance to create a self-inflicted crisis come December, so stay tuned.

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Last updated: Oct. 12, 2021

This article originally appeared on GOBankingRates.com: Why the Debt Ceiling Is Always Up for Debate