The U.S. is at its limit. On January 19, the newly sworn-in 118th Congress officially reached its debt ceiling - a whopping $31.4 trillion limit set back in 2021. This development has sparked heated public debate between Democrats and Republicans over how to best handle the crisis and its fallout.
Technically, the U.S. still has until June, when it can no longer cover its debt. After that, the Treasury says it will engage in “extraordinary measures” by moving assets around to ensure government social programs, such as Social Security, Medicare, Medicaid, and other federal employees will be paid.
If the U.S. defaulted on its debt - apart from it being an unprecedented event - it would certainly cause a worldwide economic catastrophe and create many unhappy, unpaid people and creditors. Having never defaulted on its debt is a big reason why the U.S. dollar is the strongest currency and why bonds issued on “full faith and credit” are the global standard of investment security.
But how did the U.S. get here, and why all the debate on how to move forward?
Historically, the debt ceiling is neither detailed in the Constitution nor in any of its Amendments. Rather, it’s part of a statute passed during World War I, which enabled the government to issue bonds to finance the war. Total debt had already been accumulating since the late 1700s with each subsequent budget deficit, but due to legislative opposition against increasing debt or entering the war, legislators proposed adding a debt ceiling as a measure to help pass the bonds bill. However, the initial limit of a few billion dollars soon proved inadequate, resulting in the limit steadily rising over the following decades.
In fact, since 1960, the debt ceiling has been raised 78 times,
“But why all the fuss? Why not just raise it again?” one could ask. It's a bit more complicated than that, especially given recent events.
For starters, there are three options available to Congress: (1) raise the debt ceiling, (2) cut taxes and subsequent spending, or (3) default on its loans. Defaulting on loans is universally recognized as undesirable - but that’s the point.
As Ron Elving from NPR states, “…for those on Capitol Hill who would threaten a default as a means to compel concessions on policy, the destructive power of default is what makes it attractive as a tactic.”
With the new Republican majority in the House, many hardline Republicans, especially the House Freedom Caucus, are strongly opposed to raising the debt ceiling, preferring instead to shrink the role of government by reducing spending, including reeling back spending on popular programs.
But even so, with high inflation and a possible recession looming, a deficit reduction might be an economically irresponsible decision.
As Megan Greene, global chief economist at the Kroll Institute, states, “Spending cuts and tax hikes would kill off growth in a year when we’re more likely than not to go into recession… It’s not clear that it would put us onto a more sustainable fiscal footing at all.”
The debt can be conceptualized as resulting from the gap between how much citizens are willing to pay versus how much benefits they will receive in return. This essentially means people generally want minimum taxes while still enjoying as many benefits as possible, such as Social Security, Medicare, etc.
If balancing the budget is the goal, then there are still many logistical problems. According to the Committee for a Responsible Federal Budget, they estimate that “to achieve balance within a decade, all spending would need to be cut by roughly 1/4 and that the necessary cuts would grow to 85 percent if defense, Veterans, Social Security, and Medicare spending were off the table.”
Resolutions between Democrats and Republicans are unlikely to end any time soon. In order to win his bid for House speakership from fellow conservatives, Republican House Speaker Kevin McCarthy (R-CA) conceded that any increase in the debt ceiling would require spending cuts to crack down on wasteful expenses, though never specifying where.
On February 1, House Speaker Kevin McCarthy (R-CA) met with President Biden to discuss how to avoid defaulting on U.S. debt. Though neither party could reach a solution, the meeting proved to be productive, according to each's testimony.
On February 14, during a speech in front of the National Association of Counties in Washington D.C., Biden and U.S. Secretary of the Treasury Janet Yellen warned of an economic “catastrophe” that would result from a debt default.
“In the longer term, a default would raise the cost of borrowing into perpetuity. Future investments, including public investments, would become substantially more costly,” Yellen said. “Household payments on mortgages, auto loans, and credit cards would rise, and American businesses would see credit markets deteriorate… On top of that, it is unlikely that the federal government would be able to issue payments to millions of Americans, including our military families and seniors who rely on Social Security.”
Even among American voters, common ground is hard to find. According to an NPR poll, 8 in 10 Democrats are in favor of raising the debt ceiling, while 7 in 10 Republicans are opposed. Independents, in this case, are split evenly. Additionally, while 7 in 10 people (Republicans included) want compromise among their representatives, there’s a split on how to close the debt best. 50% favored cutting programs and services, while 46% favored raising taxes and fees. The majority of independents sided with three-quarters of Republicans favoring tax cuts.
While Democrats hold steadfast in wanting to raise the debt ceiling to avoid a default, Republicans, with their new House majority, also stand resolute in their desire for substantive policy change to cut back on wasteful spending. Until Republicans and Democrats can find common ground over policy, it can be expected that the debate will likely continue into the near future.