What is the debt ceiling and why does it matter
Photo by Evan Coren, view of the US Treasury Building
In the coming days and weeks there is going to be a lot in the news about the debt ceiling, since the world economy will be dependent on political decisions in Washington on this topic.
The debt ceiling is an arbitrary number that the US Congress says the US cannot borrow more than.
The number is set by a law passed by Congress and isn’t based on anything. It is completely arbitrary and has been raised routinely throughout US history. Since 1960 it has been raised/extended/re-defined “49 times under Republican presidents and 29 times under Democratic presidents.”
It is an administrative act to allow the Federal government to pay for items Congress had previously appropriated.
Basically it allows the Federal government to keep making payments on prior purchases.
Not raising the debt limit would cause the US to default on its debts, which many economists believe will have dire impact on the world economy:
In 2011, Republican brinkmanship over the debt ceiling – when the US came close to default, but ultimately avoided it – caused the US credit rating to be downgraded for the first time in its history, sent stock market prices tumbling, and shrunk retirement saves.
Default would send the cost for the US to borrow money up as creditors see buying US bonds as more risky.
This would mean more tax dollars would be needed to pay for interest rather than improve Americans’ lives.
US government default could send interest rates for everyone up causing businesses and consumers to have a hard time getting loans. This could lead to:
layoffs.
less ability for businesses to adapt to an economy reshaped by the pandemic.
more bankruptcies.
consumers purchasing less.
the housing market slowing significantly.
The chief economist at Ernst & Young’s global strategy subsidiary has said failing to raise the debt ceiling “risks a self-inflicted recession."
Social Security recipients might not get their Social Security payments that many elderly and disabled Americans depend on for basic necessities, since this is one of the financial obligations that Congress has already made.
This, however, runs into an area where two laws may contradict each other as one law requires payment where the other law prohibits the US government from getting the money to make the payment.
In theory there could be a court battle over this, but that would take time and in the meantime the economy would be hit hard.
More likely, federal contractors and federal workers might not get paid on time, since these are also financial obligations that Congress has already made.
In the meantime, while the US Treasury tries to extend as long as possible the time before the debt ceiling is reached, the Office of Management and Budget may direct federal government agencies not to hire new employees or initiate new contracts. This could massively interfere in the federal government ability to perform basic functions.
Gumming up the works of the federal government might actually be one of the goals of the Republicans threatening to not increase the debt ceiling unless the Democrats agree to give them what the Republicans want.
This hostage taking of the American and world economy risks massive unnecessary economic hardship.
President Biden and the Democrats have been very clear that they refuse to be taken hostage. They know if they give in to anything and don’t just insist the debt ceiling be raised without deals on other matters they are opening a Pandora’s box of constantly being taken hostage.
Where does this leave us on how to resolve this:
The Treasury could mint a coin of any denomination to pay US obligations, but this has been rejected by the Biden administration as too gimmicky and also likely to have its own negative consequences on the strength of the dollar as the world currency and the ability for the US to borrow money at low interest rates in the future.
There could be a court case resulting from the federal government determining that laws obligating the US to pay its bills contradict the law setting the debt ceiling. With these laws in conflict they can pay the US bills and then fight it out in court.
It is unlikely the Biden administration would take this approach because:
there would be massive economic hardship while this made its way through the court system.
they are unlikely to risk having this Supreme Court decide this case.
taking this approach will nearly certainly lead to the House Republicans trying to impeach Biden.
Though the House Republicans will likely try to impeach Biden on other matters, Biden would most likely prefer to fight impeachment on more politically solid ground.
A discharge petition in the US House of Representatives.
This is the most likely way to resolve the debt limit.
It is a procedure by which legislation can be brought to a vote of the full US House of Representatives over the objections of the Speaker and committees.
218 signatures are required for a discharge petitions, so some House Republicans will be required to join House Democrats in signing the discharge petition.
This isn’t a vote, so past House rules have said that absences and votes of “present” do not change the need for a majority of the total number of the full House, which is 218 signatures.
In the past, additional signatures have not been allowed after 218 has been reached, so this may create interesting dynamics as some Republicans may not want to be the deciding signature that helps a discharge petition reach 218, since that would create political pressure they don’t want.
It is conceivable – that to provide political cover – more House Republicans than are needed to achieve the majority sign the petition and some Democrats either don’t sign or take their name off to allow Republicans to sign to allow this political cover.
One variation on this is if Republicans seem to be staying united behind their hostage taking, all Democrats might sign the discharge petition to show that the discharge petition is the way out. Then, once more than enough Republicans agree to also sign the discharge petition, it still is possible that a few Democrats later take their name off the discharge petition to allow more than the bare minimum of Republicans to sign it and then a Democrat re-signs it to be the deciding signature.
Until February 21, 2023, when there is a special election in heavily Democratic VA-4 to fill the seat left by the death of Congressman Donald McEachin (D), it will take at least six House Republicans to sign the discharge petition. After that special election, if as expected the seat is won by a Democrat, it will take at least five House Republicans to sign the discharge petition.