The United States has been borrowing its way out of mounting obligations and lowered revenues for some time. We rely on the federal government to provide a variety of services across the country, including healthcare for veterans, special education programs, and energy grants for those with lower incomes. When tax income is down, the government cannot simply stop providing for the public. Instead, Congress authorizes the federal government to borrow to pays its bills, with the expectation that those loans (and their interest) will be repaid down the line.
The United States Government began its life with debt left from the Revolutionary War. It has maintained a balance ever since, except for a brief period in 1835 when the debt fell to $0 under President Andrew Jackson. Great periods of increase in this debt are associated frequently (but not always) with war: the Civil War saw a huge increase, as did both World Wars. Debt is typically displayed as a percentage of gross domestic product (GDP), or the total amount of goods and services produced by a country in one year. Using this ratio to measure, our current debt is a smaller percent of GDP than the debt incurred after WWII, but we are quickly approaching that historic level.
Congress has attempted to control the amount the country may borrow in two important ways. The most recent is a system known as PAYGO (pay as you go), which requires that all spending measures considered by Congress which would increase the deficit or decrease the surplus be offset by a cut in other spending or an increase in revenue. This system was in effect by law from 1990 until 2002, when it was allowed to expire. When the Democratic Congress came to power in 2007, it reinstated PAYGO as a rule in the House and Senate instead of a formal law. In 2009, Congress took up a measure to make it law once more and President Obama signed the Statutory Pay-As-You-Go Act of 2010 into law in February of 2010.
The other piece of legislation is older and cropping up frequently in the news. As the United States edged closer to full involvement in World War I, Congress knew they needed a way to pay for this war. They passed a series of Liberty Bond acts, and the second of these, passed in 1917, established a limit to the total federal debt which has been in place ever since. This limit is commonly referred to as the debt ceiling; it has been raised 10 times since 1917 as the federal debt has grown towards the statutory limit.
The US government will hit the debt ceiling, which is $14.294 trillion, in February or March of 2011. This is putting pressure on the new Congress to decide whether or not it will vote to increase the limit to allow the government to continue borrowing to meet its obligations. The rhetoric of debt reduction fueled the 2010 mid-term election season, and a recent poll suggests that upwards of 71% of Americans do not favor allowing the debt ceiling to rise. With ideological and constituent pressures coming to bear on each Representative and Senator, the battle will be fierce.
What is at stake if the limit does not increase? We can make many educated guesses, but no one can be sure because it has never happened. There are two major areas of questioning: What happens to US currency and economic policy? And, what happens to the US government's bills?
If the government arrived at the debt ceiling and couldn't borrow anymore, it would begin defaulting on its bills – essentially stop paying them. This word is familiar to many Americans who watched Greece and Ireland's financial crises last year. When a country does not repay all of its debts, investors become concerned and a country's credit rating is lowered. The rating serves to illustrate a borrower's worthiness of credit, much like an individual credit score.
Two of three international companies who rate the credit of a country's government have warned that the United States' perfect AAA score will be lowered if the debt forecasts do not improve soon. This has serious negative impact for the United States Dollar as the medium of world economic exchange, but the immediate downside is increased interest rates on loans made to the government. Currently, 13.6 cents of every federal tax dollar goes toward paying the interest on the national debt alone. Please see NPP's Tax Chart Calculator to learn how much of your federal taxes went to interest on the debt last year.
The second area of concern is what programs would be cut or stopped completely due to a legal inability to borrow more. In numbers, the Center for American Progress (CAP) says, “If we assume that the Obama administration did not want to default on the national debt, and thus continued to make interest payments on outstanding U.S. Treasury obligations ($244 billion), then being forced to balance the budget next year would mean cutting over 40 percent of all other expenditures (emphasis mine).” This is bleak news for discretionary funding, particularly programs which have been “on the chopping block” as of late, like unemployment benefits.
Some question the predicted dire impact of default. Stan Collender, writing in Roll Call, lists some ways in which the government can get around the ceiling, such as leasing out buildings or slowing down payment schedules to contractors. Additionally, CAP points out in the previously linked report that a “debt ceiling crisis” occurred under President Clinton during the winter of 1995 and 1996 when the Republican leadership pushed for agreement with the “Contract With America” before they would increase the debt limit. As the President stood firm in refusing and the markets reacted poorly to uncertainty, public opinion turned against the GOP and the limit was ultimately increased.
The uncertainty associated with a new Congress, combined with uncertainty over whether to raise the debt ceiling in the short term and how to fix the economy in the long term, makes the current fight both crucial and hard to call. When you read press reports, think tank analyses, and political speeches, you will now be a little more prepared to judge the arguments and pick a side. Knowledge is the key to an active, vibrant democracy.