If lawmakers on Capitol Hill remain deadlocked on raising the debt ceiling, the government could default – in essence, unable to pay the bills. This would have a direct impact on the wallets of millions of Americans, including those who invest in the stock market and those who benefit from government programs such as Social Security and Medicaid.
“It would be disastrous for the US economy, for global financial markets and for millions of families and workers whose financial security would be compromised by late payments,” Treasury Secretary Janet Yellen warned during a hearing September 28.
Raising the debt ceiling, she said, is “necessary to avoid a catastrophic event for our economy.”
But if you’ve ever wondered what exactly the debt limit is, you’re not alone. Here’s what it is and some of the real impacts it can have.
What is the debt ceiling?
The debt ceiling is a cap on the amount of money the US government can borrow to pay off its debts.
Each year, Congress passes a budget that includes government spending for infrastructure, programs such as Social Security, and federal worker wages. Congress also requires people to pay for all of these expenses. But for years the government has spent more than it takes in taxes and other revenues, increasing the federal deficit.
The government must borrow money to keep paying what Congress has already agreed to. The debt ceiling limits the amount the US government can borrow to pay its bills.
Why should I care?
If the government cannot borrow the money to continue paying for the programs, there will be real effects for millions of Americans. Here are some of those potential effects, according to Yellen, the White House and the Committee for a Responsible Federal Budget, a non-partisan organization.
- 15 million seniors could stop receiving Social Security payments, or see delays.
- 30 million families could stop receiving the expanded child tax credit payments from President Joe Biden, or see delays.
- The US military could stop receiving paychecks.
- Veterans’ benefits could cease or be delayed.
- Postal workers and federal employees could stop receiving paychecks.
- The creditworthiness of the United States could be lowered, which would push up interest rates, which would increase mortgage, car and credit card payments.
- Doubt about the generally reliable US currency could push markets down, hurting 401k and other investments. (The S&P 500 lost 17% in the months surrounding the latest debt ceiling standoff.)
- FEMA funding for hurricane and wildfire victims could stop.
- Public health funding for pandemic mitigation efforts could be halted.
- The infant nutrition program and other food aid could be stopped.
Moody’s Analytics has estimated that even a long deadlock on the debt ceiling could result in the loss of nearly 6 million jobs, raise the unemployment rate to 9% (from 5.2% currently) and cause the stock market to lose. about a third of its value, wiping out $ 15 trillion in household wealth.
Could it be worse than a government shutdown?
Yes. It is even more important than a government decision. A government shutdown occurs when Congress does not approve a new spending bill for the next fiscal year, so new payments, such as paychecks, are stopped. In 2019, approximately 800,000 federal employees were affected by a government shutdown and markets fell.
But the United States has never defaulted on its credit. It would be uncharted territory. The suspension of virtually all previously approved government programs and the resulting economic shocks would be unprecedented.
âMany more parties are not getting paid on default,â the Committee for a Responsible Federal Budget said. âWithout enough money to pay your bills, all payments are at risk, including all government spending, mandatory payments, interest on our debt, and payments to US bondholders. While a government shutdown would be disruptive, a government default could be disastrous. “
Since the introduction of the debt ceiling system in 1917, Congress has never raised the debt ceiling. Congress has voted 80 times to raise or suspend the debt ceiling since 1960.
Why are we reaching the debt ceiling?
Technically, we have already hit the debt ceiling on August 1. But at that point, the Treasury Department began to take “extraordinary measures” to continue paying government bills. Basically there is sleight of hand when it comes to accounting and investing. But one day the department will run out of tips and money. Yellen set the date for October 18 in a letter to lawmakers on Tuesday.
Right now, federal debt stands at $ 28.43 trillion, according to Foundation tracker Peter G. Peterson. The current debt ceiling is actually $ 28.4 trillion, underscoring pressure from Yellen to continue paying the bills through “extraordinary measures.”
Does raising the debt ceiling allow the government to spend more?
Nope. Here’s how Yellen put it at a hearing Tuesday on Capitol Hill: âThis has nothing to do with future payment programs, it’s just about paying bills that have already been incurred by this Congress, at previous Conventions, and it’s about fixing past commitments – like you said, paying our credit card bill. “
Democrats, who depend on Republican aid to raise the debt ceiling, repeatedly say that raising the debt ceiling does not authorize new government spending. It only allows the government to borrow money to pay for expenses that previous politicians have already agreed to, including former President Donald Trump and then Senate Majority Leader Mitch McConnell.
But the debt ceiling standoff comes as lawmakers, in an extremely polarized environment, debate one of the biggest government spending programs in history, Biden’s $ 3.5 trillion program for better rebuild.
The debate on public spending leads to the politicization of raising the debt ceiling and the negotiations have become completely intertwined. Republicans insist that if Democrats are to push through such a major spending bill through special budget rules that would not require Republican support, they can also raise the debt ceiling themselves.
Why do we even have a debt ceiling?
One hundred years ago, Congress had to approve every case of borrowing money – a major drawback.
For example, in 1917, Congress passed a debt ceiling, which would allow the Treasury Department to borrow money for any approved expense without obtaining permission from Congress, up to a certain limit. The limit exists to ensure that the âpower of the stock market,â or the ability to determine government spending, stays with the legislative branch, instead of passing to the Treasury Department.
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