When President Joe Biden signed a federal funding bill last week, a government shutdown was averted, at least for the moment, but this week Congressional leaders agreed to resolve a potentially more serious looming problem: reaching the so-called debt ceiling.
What exactly is the debt ceiling? Politicians and economists throw around a lot of confounding jargon about the topic that’s rarely heard in day-to-day life—terminology that can camouflage the gist of the debate, which centers on how much the government should be spending, and in turn, borrowing. It’s enough to make your head spin, especially when there are legislative bills passed—as there was in the House this week—not on the ceiling itself, but on how to limit lawmakers’ debate on the ceiling.
Here’s the meaning of some key terms used in this critical discussion.
The debt ceiling, or debt limit, is the amount of money the Treasury is allowed to borrow (per Congress) to pay for spending the government has already committed to—including Social Security and Medicare payments, military salaries, interest on the national debt, and a multitude of other expenses.
Because the government spends more money than it takes in—which has been true since 2002—it can’t pay its bills in full unless it borrows money to do so. Congress raised the debt ceiling in October so the government could pay its obligations but we have run up against the new ceiling, and the Treasury is now using accounting maneuvers to buy breathing room.
In fact, the Treasury may not be able to finance the government’s obligations after Dec. 15, Treasury Secretary Janet Yellen estimated last month, though more recently the Bipartisan Policy Center think tank put that timeframe between Dec. 21 and Jan. 28.
Fortunately, a crisis is less likely now that Senate Republican leaders have agreed in principle on raising the debt ceiling, saying they’ll go along with a bill removing their ability to block the latest increase with a filibuster (see more on filibusters below.)
Default is when a borrower fails to pay its creditors. In this case, the borrower is the U.S. government and the creditors are mostly people who hold the national debt in the form of Treasury bonds and other securities. Because the debt limit has been reached, if the Treasury were to exhaust the time-buying maneuvers at its disposal, it would have some hard choices to make. With money steadily coming in from taxes, it could pay some expenses but not others.
Here’s another way to think of it. While the day-to-day functioning of federal agencies can continue running through Feb. 18 because of the funding bill Biden just signed, whether the money is there to pay for those operations, or anything else the government does, depends on whether Congress raises or suspends the debt limit. If it doesn’t, the government could run into serious financial trouble—even to the point of defaulting on its obligations.
Some economists believe the Treasury would prioritize paying interest on the national debt first, and everything else a little at a time, in order to minimize the damage to the financial system that could come from a default. For instance, Social Security recipients might receive their payments late, or maybe not at all.
The government would be impaired in performing its basic functions, the dollar would lose value, stocks would fall, and it could take decades for the U.S. economy to fully recover from a default, White House economics advisors warned. No one knows for sure exactly what would happen, since it’s never occurred in the modern history of the U.S. The aftermath of defaults by countries such as Argentina, Greece, and Russia over the past several decades, however, suggests that the experience is better avoided.
Government shutdowns occur when Congress fails to authorize the annual spending that keeps the federal government running. This is what Biden avoided when he signed the funding bill on Friday. While government shutdowns are sometimes discussed at the same time of year as the debt limit, they are entirely different things. These shutdowns, like the partial shutdown between 2018 and 2019, can disrupt certain operations, like national parks and the activities of federal agencies, for as long as the shutdown lasts, causing economic harm.
“However, the economic impact of a shutdown is a pale shadow beside the impact of defaulting on the federal government’s obligations because of the debt limit,” White House economics advisors said in a blog post earlier this year.
While a government shutdown and a default are easy to confuse, a default represents a much more severe situation. To make a broad comparison to household finances, a shutdown would be like a credit card being declined, preventing you from buying things, while a default is more like not being able to pay bills you’ve already incurred because you ran out of money.
During a previous round of the debt limit crisis earlier in the year, Democrats accused Republicans of holding up the increase to the debt ceiling, which may seem an odd thing to say considering the Democrats control all the levers of power needed to enact laws: the House of Representatives, the Senate, and the presidency.
Despite being in the minority, however, Republicans still have the power to obstruct legislation in the Senate thanks to the filibuster rule, which gives senators the ability to block bills they don’t like. A filibuster requires 60 votes to overcome, and the Democrats only have 50 (with Democratic Vice President Kamala Harris waiting in the wings as a tiebreaker, or 51st vote). A process called budget reconciliation can get around the filibuster, but there are other ways around it too.
The House passed a resolution Tuesday intended to clear a path for the Senate to raise the debt ceiling without being blocked by a filibuster. The maneuver itself needs 60 votes in the Senate—and then both chambers must pass a higher ceiling by a simple majority vote, but Sen. Mitch McConnell, the Republican minority leader, announced Tuesday he was on board with the plan.
Full Faith and Credit
“Full faith and credit” is an antiquated-sounding phrase that often comes up during debt ceiling debates.
“We’re able to borrow because we always pay our debt,” President Joe Biden said in a speech urging Congress to resolve the earlier standoff, back in October. “We always pay what we owe. We’ve never failed. That’s America. That’s who we are. That’s what’s called for. It’s called ‘full faith and credit of the United States.’ It’s rock solid. It’s the best in the world.”
The phrase, which is borrowed from the U.S. Constitution, refers to the belief that the U.S. government can always pay its debts using its power of taxation.
This story was originally published on Oct. 7, 2021.
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