Question

In: Economics

1) What is the debt limit and why do we have one? 2) Does raising the...

1) What is the debt limit and why do we have one?

2) Does raising the debt limit allow the government to spend more money?

3) What happens when the Treasury hits the debt ceiling?

4) Why is raising the debt ceiling so controversial?

5) What happens if congress doesn't act?

6) What are the dangers of rising national debt?

7) Has the debt ceiling ever been reduced?

8) Should Congress keep expanding the debt ceiling? Why/why not?

Solutions

Expert Solution

1) The debt limit is the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments.

Reason for having debt limit is that the debt limit does not authorize new spending commitments. It simply allows the government to finance existing legal obligations that Congresses and presidents of both parties have made in the past. Failing to increase the debt limit would have catastrophic economic consequences.

2) No, raising the debt limit does not allow the government to spend more money.

3) First, the Treasury employs a series of cash-saving tools known as “extraordinary measures.” These maneuvers suppress the level of intragovernmental debt in order to create space for public debt.

4) The debt limit has become a flash point for debate about the size of the federal budget. Politicians who want to reduce deficits or restrain the size of government have used the debt limit to negotiate for spending caps or budget restrictions in the past, a tactic that has proven difficult but successful on occasion, as it was in 2011.


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