The Washington Post Sunday
Treasury seeks to stave o≠ calamity
As debt ceiling battle looms in Congress, here are the issues and perils in play
House Republicans are locked in a standoff with the Biden administration over a deadline to raise the national debt ceiling or risk fiscal calamity.
The Treasury Department on Thursday started taking “extraordinary measures” to delay an economic catastrophe for a few months now that the federal government has borrowed up to the current $31.4 trillion debt limit.
While the Biden administration is urging lawmakers to pass a law allowing more borrowing, several House Republicans have said they will vote to do so only if the administration agrees to steep spending cuts, which the White House and the Democratic majority in the Senate have viewed as a nonstarter. Here is a look at what the debt ceiling is and why you are hearing about it so much now.
What is the national debt ceiling?
It is a legal restriction on how much money the federal government can borrow to pay its bills. Congress instituted the debt ceiling in 1917 as a way to rein in federal agencies that were basically ignoring the constitutional power of lawmakers to designate how much money the government can spend, said David Super, a law professor and budgetary analyst at Georgetown University.
Raising the debt limit is an inherently political issue, and it usually grabs the most attention when government is divided in Washington, because when one party controls Congress and the White House, it usually opts to raise the limit without controversy.
The new Republican majority in the House of Representatives argues that it must impose fiscal limits on the federal budget to rein in spending, and the debt fight gives members an opportunity to display that determination. Democrats argue that the effort is grandstanding that risks the United States defaulting on its debt, an event that has never happened and probably would be quite damaging to the domestic economy.
What happens when Congress raises it?
Most years, the federal government spends more than it takes
so the government has to borrow money to cover the shortfall. That means it reaches the limit fairly often.
Lawmakers can either raise the debt ceiling by a specific amount or vote to suspend the debt ceiling for a period of time to allow the Treasury Department to borrow what it needs. As the debt ceiling fight has become more politicized, they have suspended it for longer and longer periods.
Until recently, it was a routine chore for Congress to raise the national debt ceiling. Since 1960, it has intervened 78 times to change the debt limit in some way, according to the Treasury Department.
Raising the debt limit allows the federal government to continue issuing the bonds that fund its operations and also enable commerce around the globe. Treasury bonds raise the money the government needs for its many operations, from the military to social programs, but they are also now a bedrock of global finance and help the Federal Reserve control the money supply.
What happens if the government defaults?
It would not be pretty. When the United States was on the brink of breaking through the debt ceiling in October 2021, The Washington Post’s Alyssa Fowers reported that it would not be able to pay more than 60 percent of its bills the first week of a default. The government would be forced to prioritize among various expenditures it is already legally bound to make but would not be able to borrow money for, such as paying for Social Security, issuing tax refunds and paying the salaries of federal workers and military personnel.
Such a scenario could immediately plunge the United States into a recession, The Post’s Jeff Stein reported at the time: “Mark Zandi, chief economist at Moody’s Analytics, found that a prolonged impasse over the debt ceiling would cost the U.S. economy up to 6 million jobs, wipe out as much as $15 trillion in household wealth, and send the unemployment rate surging to roughly 9 percent from around 5 percent.”
The United States has gotten so close to a default in the recent past that its credit rating got downgraded. In 2011, for instance, House Republicans voted down a bill to raise the debt limit, unless the government slashed its annual spending. President Barack Obama agreed to sharp spending curbs that only recently expired. The credit agency Standard & Poor’s downgraded its ratin, on U.S. debt for the first time ever that August, citing the risk of a default caused by “political brinkmanship.”
Since then, there have been pretty regular fights in Washington over the debt limit that often force the Treasury Department to take what it calls “extraordinary measures” to avoid borrowing more. Nonpartisan fiscal experts at the Congressional Research Service warn that even the threat of a default is counterproductive to national fiscal health, lowering the financial standing of the United States and raising interest rates, which makes borrowing even more expensive once a deal on the debt ceiling is reached.
What happens next?
Treasury Secretary Janet L. Yellen has said the “extraordinary measures” now being taken by her agency include suspending investments by numerous government funds and targeting the easing iest debt that the federal government can pay off while borrowing as little as possible.
But Yellen also wrote in a letter to House Speaker Kevin McCarthy (R-Calif.) that the Treasury Department cannot predict how much time these drastic policies would buy the government. Averting the worst-case scenario requires the Biden administration, the Democratic-led Senate and the Republican-led House to come to an agreement on raising the limit. However, the fractious Republican House is divided between conservative and moderate factions over how to approach talks, which lawmakers said have barely begun.
The White House and Democrats in Congress have also said that they do not consider raising the debt limit an issue to be bargained over. Reaching an agreement will require reconciling those very different perspectives on the issue.