Question

1. Consider the debt ceiling of the United States and the consequences of a default by the United States on its national debt.  Some commentators and politicians during the 2013 negotiations over raising the debt ceiling commented that failure to raise the debt ceiling would not have that dramatic an impact on world financial markets.  Comment on the consequences of a default by the US on its debt.

Answer 1

The debt ceiling is a limit that Congress imposes on how much debt the federal government can carry at any given time. When the ceiling is reached, the U.S. Treasury Department cannot issue any more Treasury bills, bonds, or notes. It can only pay bills as it receives tax revenues. If the revenue isn't enough, the Treasury Secretary must choose between paying federal employee salaries, Social Security benefits, or the interest on the national debt.

The nation's debt limit is similar to the limit your credit card company places on your spending. But there's one significant difference. Congress is in charge of both its spending and the debt limit. It already knows how much it will add to the debt when it approves each year's budget deficit. When it refuses to increase the debt limit, it's saying it wants to spend but not pay its bills. That's like your credit card company allowing you to spend above its limit and then refusing to pay the stores for your purchases.

Congress imposes the debt ceiling on the statutory debt limit. That's the outstanding debt in U.S. Treasury notes after adjustments. The adjustments include unamortized discounts, old debt, and guaranteed debt. It also includes debt held by the Federal Financing Bank. The statutory debt limit is a little less than the total outstanding U.S. debt recorded by the national debt clock.

There are two types of U.S. debt. The first is what the government owes to itself. Most of that is the Social Security Trust Fund and federal employee retirement funds. The debt that's owed to everyone else is the public debt. It's 70 percent of the total debt.

Congress must raise the debt ceiling so the United States doesn't default on its debt. During the last 10 years, Congress increased the debt ceiling 10 times. It raised it four times in 2008 and 2009 alone. If you look at the debt ceiling history, you'll see that Congress usually thinks nothing of raising it.

The debt ceiling only matters when the president and Congress can't agree on fiscal policy. That occurred in 1985, 1995 to 1996, 2002, 2003, 2011, and 2013. It's a last resort to get attention by the non-majority in Congress. They might have felt slighted by the budget process.

Debt Ceiling Crisis 2013

In January 2013, Congress threatened not to raise the debt ceiling. It wanted to force the federal government to cut spending in the Fiscal Year 2013 budget. Its position was that one dollar of spending should be cut for every dollar the ceiling was raised. President Obama replied he would not negotiate since the debt was incurred to pay bills that Congress had already approved. Fortunately, better-than-expected revenues meant the debt ceiling debate was postponed until the fall.

On September 25, 2013, the Treasury Secretary warned that the nation would reach the debt ceiling on October 17. Many Republicans said they would only raise the ceiling if funding for Obamacare were taken out of the FY 2014 budget. At first, it looked like Boehner would pass a debt ceiling override without them. He didn’t want Republicans to be blamed for another fiasco like the 2011 debt crisis. Then he changed his mind.

On October 1, 2013, the government shut down because Congress hadn't approved the funding bill. The Senate wouldn't approve a bill that defunded Obamacare. The House wouldn't approve a bill that funded it. Boehner announced he wouldn't raise the debt ceiling unless Democrats agreed to negotiate cuts in mandatory programs, such as Medicare, Medicaid, and Obamacare. At the last minute, the Senate and House agreed upon a deal to reopen the government and raise the debt ceiling. The Obama administration reported that this government shutdown cost 120,000 jobs and slowed economic growth by as much as 0.6 percent.On October 17, 2013, Congress agreed to a deal that would let Treasury issue debt until February 7, 2014.

Congress created the debt ceiling in the Second Liberty Bond Act of 1917. It allowed the Treasury Department to issue Liberty bonds so the United States could finance its World War I military expenses. These longer-term bonds had lower interest payments than the short-term bills Treasury used before the Act. Congress now had the ability to control overall government spending for the first time. Before that, it had only issued authorization for specific debt, such as the Panama Canal loan or other short-term notes.

This is no longer necessary. In 1974, Congress created the budget process that allows it to control spending. That's why Congress raises the debt ceiling. When the budget process works smoothly, both houses of Congress and the President have already agreed on how much the government will spend. There's no need for a debt ceiling. It merely allows the government to borrow money to pay the bills it has already approved.

Elected officials have a lot of pressure to increase the annual U.S. budget deficit. Increases in the budget push the national debt higher and higher. That's because there is not much incentive for politicians to curb government spending. They get re-elected for creating programs that benefit their constituency and their donors. They also stay in office if they cut taxes. Deficit spending does, in general, create economic growth.