Lawmakers have been notified of a new deadline if they want to avoid a damaging US debt default: June 1, 2023.
If Congress fails to increase the country’s borrowing limit by that date, Treasury Secretary Janet Yellen warnedthen the federal government threatens to be “unable to continue to meet all government obligations”.
Yellen gave herself a little wiggle room by saying it’s quite difficult to pinpoint the exact date of default, and was clear about the potential impact: “If Congress fails to raise the debt limit, it would cause serious problems for American families, damages our global leadership, and raises questions about our ability to defend our national security interests.”
Yuck!
The warning could spur leaders in Congress into action. Speaker of the House Kevin McCarthy kicked off the negotiations on the debt ceiling in April, which set out the criteria under which Republicans would accept an increase. But McCarthy’s proposals – which have since been adopted a narrow mood in the Chamber — have been shot down by the Biden administration for pulling strings that Democrats deemed unacceptable.
Explaining why the US has a debt ceiling in the first place – and why it is a constant source of political bickering – is a complicated matter. Here are five articles from The Conversation’s archive that provide some answers.
1. What exactly is the debt ceiling?
So, some basics. The debt ceiling was set by the US Congress in 1917. It limits the total national debt by setting a maximum amount that the government can borrow.
Steven Pressman, a economist at De Nieuwe School, explained that the original goal was “to get then-President Woodrow Wilson to spend the money he saw fit to fight World War I without waiting for oft-absent lawmakers to act. Congress, however, did not want to write the president a blank check, so capped borrowing at $11.5 billion and required legislation for any increase.”
Since then, the debt ceiling has been raised dozens of times. It currently stands at $31.4 trillion – a figure that has already been reached. As a result, the Treasury has taken “extraordinary measures” to allow it to continue borrowing without breaching the ceiling. However, such measures can only be temporary – meaning that at some point Congress will have to act to lift the ceiling or default on its debt obligations, which is expected to take place in July or August.
Read more: Why America has a debt ceiling: 5 questions answered
2. ‘Catastrophic’ consequences
How bad could it be if the US defaults on its debt obligations? Well, pretty bad, according to Michael Humphries, deputy chairman of business administration at the University of Tourowho wrote two articles about the consequences.
“The domino effect of US default would be catastrophic. Investors such as pension funds and banks holding US debt could go bankrupt. Tens of millions of Americans and thousands of businesses that rely on government aid could suffer. The value of the dollar could collapse and the US economy would most likely go back into recession,” he wrote.
Read more: If the US defaults on debt, expect the dollar to fall – and with it Americans’ living standards
3. Undermining the dollar
And that’s not all.
Such a default could undermine the US dollar’s position as a “unit of account,” making it a widely used currency in global finance and trade. Losing this status would be a severe economic and political blow to the US. But Humphries admitted it’s hard to put a dollar value on the price of default:
“The truth is we really don’t know what’s going to happen or how bad it’s going to get. The extent of the damage caused by a US default is difficult to estimate in advance, because this has never happened before.”
Read more: Failing to pay US debt could cause dollar collapse – and seriously erode America’s political and economic power
4. Can McCarthy make a deal?
Many of these concessions are well known, such as allowing a single member of the House to cast a vote to remove him as speaker. But there are many more that remain secret that could influence McCarthy’s decision-making, argued Stanley M. Brand, a law professor at Penn State and former general counsel to the House. These could make it much more difficult to reach a deal with Biden on the debt ceiling.
“Some of the new rules that have emerged from McCarthy’s concessions seem to democratize procedures for considering and passing legislation. But they will likely make it difficult for members to get the working majority needed to pass legislation,” explains Brand. “That could make things like raising the statutory debt ceiling, which is necessary to avoid a government shutdown and financial crisis, and passing legislation to fund the government difficult.”
Read more: House Speaker McCarthy’s powers are still strong – but he will fight new rules that could prevent anything from being done
5. The GOP Endgame: A Balanced Budget
Another condition McCarthy agreed to in January is to push for a “balanced budget” within 10 years.
The US government has not had a balanced budget since 2001, the year President Bill Clinton left office. Linda J Bilmesan associate professor of public policy and public finance at Harvard Kennedy School who worked in the Clinton administration from 1997 to 2001 explained how they achieved that rare feat and why it is unlikely to be repeated today.
“In 1997, after the smoke cleared, both the Clinton administration and Republicans in Congress were able to take some political credit for the resulting budget surpluses,” she wrote. “But – crucially – both sides recognized that a deal was in the best interest of the country and were able to line up their respective members to get the votes in Congress needed to approve it. The contrast with the current political landscape is stark.”
Read more: I helped balance the federal budget in the 1990s – here’s how hard it will be for the GOP to achieve that same rare feat
Editor’s Note: This story is a collection of articles from the archives of The Conversation. Parts of this article appeared in an earlier article published April 19, 2023.
