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

- BY AMBER PHILLIPS AND MATTHEW BROWN

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.

 ?? DeMeTrius FreeMAN/The WAshiNgToN PosT ?? Treasury Secretary Janet L. Yellen said the “extraordin­ary measures” include targeting the easiest debt that the government can pay off while borrowing as little as possible.
DeMeTrius FreeMAN/The WAshiNgToN PosT Treasury Secretary Janet L. Yellen said the “extraordin­ary measures” include targeting the easiest debt that the government can pay off while borrowing as little as possible.

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