It’s prime time. President Joe Biden and House Republicans have only days to act to prevent the country from defaulting on its debt. In January, the US reached its $31.4 trillion debt limit, which means the federal government can’t afford any more tabs (or borrow more money) — so paying bills on time just got a lot more complicated.
How will the debt ceiling deadline affect you? It’s a loaded question, so let’s pull the layers back. Here’s what you should know.
What is the debt ceiling?
Congress established the debt ceiling in 1917 and limits the amount the United States can borrow to fund legal obligations that lawmakers have set in the past (Social Security, tax refunds, military salaries, interest payments on debt owed, Medicare benefits, and more). In other words, it determines how much debt the United States can take on. The current debt ceiling is $31.4 trillion.
What does it mean to reach the debt ceiling?
Reaching the debt limit would not be such a hot topic if the state’s revenues exceeded its costs (the government receives money primarily from individual and corporate taxes, but also has other sources such as rents for government-owned buildings and land, sale of natural resources, and admission to national parks).
However, the United States has not been in the green since 2001, which means that for more than 20 years the government has had to borrow money to finance operations. Now that the United States has reached its debt limit, there are two options: raise the limit or suspend it until the government can pay its bills on time or face default.
Raising the debt ceiling would be exactly what it sounds like (increasing the limit the US can borrow). Suspension of the debt ceiling means that the Treasury can temporarily exceed the ceiling and borrow more than the current limit. If the US defaults, the country will not be able to pay its bills on time, and the economic impact is likely to be felt immediately.
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When is the debt ceiling raised or suspended?
In a letter to House Speaker Kevin McCarthy on Monday, Treasury Secretary Janet Yellen warned that it was “extremely likely” that the Treasury Department would be unable to meet its fiscal obligations if Congress did not raise or suspend the debt ceiling as soon as June 1. .
“I continue to urge Congress to protect the full confidence and credit of the United States by acting as quickly as possible,” she wrote.
What would happen if the United States defaulted?
In March, Mark Zandi, chief economist at Moody Analytics, warned that if the US defaulted, it would be “catastrophic” and Americans would likely pay for the default “for generations.”
For example, government employees and companies with government contracts may not be paid on time, and Social Security payments may stop. From a broader perspective, it will also lead to “a loss of consumer and business confidence,” said Brookings Institution analysts Wendy Edelberg and Louise Shiner.
Will default lead to a recession?
The Council of Economic Advisers warned in early May that a default would essentially lead to a nationwide economic collapse and lead to an “immediate and severe recession”.
said Harry Mamaisky, professor of professional practice at Columbia Business School contractor that The government has “a lot of obligations to a lot of people.”
“At some point, when there isn’t enough money, they have to start deciding who is going to pay first,” Mameski said. “Someone is not going to get the money they owe on time, and that would be devastating.”
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Still, the default’s short-term repercussions may not be nearly as damaging as the long-term repercussions — what Mamiski calls a “reputational issue” that could call into question the US’s credibility as a smart country to deal with.
“That’s my biggest risk — not that this year or next year, but will the world in five to 10 years think the United States is the best country in the world to do business in?” He said. “It’s not imminent, but if Congress doesn’t watch it, they’re going to undermine confidence.”
On Wednesday, major credit rating agency Finch placed the current US rating of “AAA” under “Negative Rating Watch,” meaning the country’s perfect score could be at risk of a credit downgrade.
“Negative evaluation monitoring reflects the increasing political partisanship that impedes reaching a decision to raise or suspend the debt limit despite the rapidly approaching date x (when the US Treasury exhausts its cash position and its ability to take extraordinary measures without incurring new debt),” the company said in a statement.
How will the default affect the small business?
A recent report by Goldman Sachs found that 65% of small business owners would be “negatively affected” if the United States defaulted on its debt. Furthermore, 90% said it was “very important” for the government to avoid default.
If the US defaults, businesses with government contracts may not see payments, and stores with customers who rely on food stamps or Social Security to pay for necessities may see a drop in spending.
“If you’re a Social Security recipient and you have rent, you may not have the money to pay rent,” Mamaisky added. “And if the landlord owes utility bills on their building, they may not be able to pay the utility bill because they didn’t get the rent.”
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Moreover, a 2011 Federal Reserve Bank of New York report said that small businesses were hardest hit during the 2008-2009 recession.
According to the report, banks become “more selective and risk averse” when granting loans in a recession, making it more difficult for individuals to obtain a small business loan.
“Small firms, which rely more on external financing and tend to be more risky, are more likely to be affected by a credit crunch,” the researchers write.
How often has the debt ceiling been raised or adjusted?
Despite the current pressure to raise or suspend the debt ceiling, it is a relatively routine practice for the US government. Since 1960, Congress has acted 78 times to raise, temporarily extend, or revise the definition of the debt limit to avoid default — 49 times under Republican presidents and 29 times under Democratic presidents, according to the Treasury Department, adding that “Congressional leaders on both sides have recognized That this is necessary.
The most recent increase was in 2021 when the debt ceiling was raised by $2.5 trillion.
What is the impediment to raising or suspending the debt ceiling?
McCarthy and the Biden administration are negotiating a deal to avoid a federal default. However, they both have different positions: McCarthy and House Republicans are pushing for $3.6 trillion cuts and future spending limits for certain programs (not specified in the bill) in exchange for raising the debt ceiling, while the Biden administration is focused on raising the limit and paying bills on time. before agreeing to any discounts.
On Thursday, the House of Representatives is scheduled to vote on a deal and then block it while negotiators continue to work on a deal.
“the next [Thursday’s] votes, if a new agreement is reached between President Biden and House Speaker McCarthy, members will receive 24 hours notice in case we need to return to Washington for any additional votes, either over the weekend or next week,” House Majority Leader Steve Scales said, per CNN.
What is the Fourteenth Amendment and what is its relationship to the debt ceiling?
The Fourteenth Amendment covers equal protection and other rights such as citizenship, state taxes, and whatever Congress may regulate. Section IV of the Amendment, which covers public debt, states, “The validity of the public debt of the United States… shall not be questioned.”
Given that the United States has reached its debt ceiling and may not be able to pay its bills, there is an argument that by invoking the Fourteenth Amendment, Biden has the legal power to bypass Congress (which approves any action to raise or suspend the debt ceiling) and continue indefinitely. Essential in issuing more debt through the treasury and ignoring the debt limit.
Biden has been supportive but cautious about invoking the Fourteenth Amendment as a solution.
“The question is, can this be done and the subpoena is in time so that it doesn’t appeal, and as a result it’s past said date and still defaults? That’s a question that I think is not resolved,” Biden told reporters. On Sunday, per The Wall Street Journal.
Some experts said the move would be unconstitutional.
Philip Wallack, a senior fellow at the American Enterprise Institute, a center-right think tank, told L.L.C Wall Street Journal.
Others have been somewhat more blunt in their opinion of the idea, with Yellen saying it could spark a “constitutional crisis,” and Rep. Chip Roy saying that if Biden goes the Fourteenth Amendment route, House Republicans will “blow the crap.”
