Another big battle is brewing over US debt ceilings. This is the legal limit on the amount the government can borrow to pay a bill. In an interview, Senate Minority Leader Mitch McConnell said they disagreed. Increase the debt ceiling in an environment of “freedom for this fiscal and spending environment”. Meeting Debt ceiling suspended Two years until July 31, 2021 in 2019.
US Treasury You can take emergency action This allows it to continue borrowing until the end of November without increasing the limit. But if the cap is not raised by then, the United States will face either a total spending cut or the prospect of an unprecedented default – potentially. Disastrous economic impact..economist Steve Pressman Explain why we have a cap, and why he thinks it’s time to scrap it.
1. What is the debt ceiling?
Like our other peoples, the government must borrow when it spends more money than it receives. They do this by issuing bonds. It is actually an IOU, promising to repay money and pay interest on a regular basis. Public debt This is the sum of all the money borrowed.
The debt cap, this Parliament was established a century ago, was the highest amount the government could borrow. It’s a national debt limit.
2. How much is the country’s debt?
Currently US government debt $ 28.5 trillion, approximately 29% more Value of all goods and services It will be produced in the US economy this year.
About a quarter of that money is actually borrowed by the government. The Social Security Administration is accumulating surpluses, investing additional money, currently $ 2.9 trillion, with government bonds. The Federal Reserve System holds over $ 5,000 billion with US Treasuries.
The rest is public debt. As of May 2021 Foreign, Business, Individual He had $ 7.14 trillion in US government debt. Japan and China are the largest holdings, each exceeding $ 1 trillion. The rest belongs to American citizens and businesses, as well as state and local governments.
3. Why are there borrowing restrictions?
Prior to 1917, Parliament allowed the government to borrow a certain amount of money for a certain period of time. Once the loan was repaid, the government could no longer borrow it unless it was authorized to do so.
The Second Liberty Bond Act of 1917 created a debt ceiling, I changed that. It allowed the continued rollover of debt without congressional approval.
Congress passed the move, allowing then-President Woodrow Wilson to spend what he felt was needed to fight World War I, without waiting for the actions of members who were often absent. But Congress didn’t want to give the president a blank check, so it limited borrowing to $ 11.5 billion and needed legislation to increase it further.
Debt ceiling Has increased dozens of times Since then it has been repeatedly interrupted. The last change was in August 2019, when Congress suspended restrictions until July 31, 2021.
The new cap, which comes into effect on August 1, will cover the debt stock at the end of July 31, or about $ 28.6 trillion.
4. What happens when the United States hits the cap?
The US government usually spends more than it takes – an additional $ 3.1 trillion in 2020. Once you hit your debt limit, you can’t borrow to make up the difference. The government can only use available cash and tax revenues.
After that, Treasury Secretary Janet Yellen said, “Special measures” Save money. One of these measures is not to temporarily fund civil service retirement programs. When the cap increases, the government will make up the difference.
Yellen’s favor is that the Treasury is expected to have $ 450 billion in liquidity at the end of July, which should last about a month. In September, estimated tax payments from businesses and individuals will go to the treasury. Then, in October, things get complicated.
If the debt ceiling is not raised before the Treasury exhausts this option, it must decide who will be paid on the daily tax receipt. Civil servants or contractors may not be paid in full. Loans to SMEs and students can be suspended.
This is technically the default when the government cannot pay all the bills. Some experts say government defaults are having dire economic consequences: rising interest rates, market panic and possibly a recession.
Such fears seem exaggerated, mainly because Congress and the President act normally when the market begins to panic. This is exactly what happened In 2013, Republicans tried to use debt caps to pay off affordable care laws.
But Americans no longer live in normal political times. The major political parties More polarized than ever.
5. Is there a better way?
United States Some countries have debt limits. Other governments function effectively without it. America too.
In my opinion, having a debt ceiling is dysfunctional. It will be difficult for the Treasury to pay the bill when due.
The best solution is to get rid of the ceiling completely. Congress has already approved spending and tax laws that require more debt. No additional borrowing needs to be approved.
It’s important to remember that the original debt ceiling was set because Congress couldn’t meet immediately and approved the expenses needed to wage the war. In 1917, the trip across the country took place by train and took several days to reach Washington. At that point, it makes sense. Today, when Congress can vote online from home, it cannot vote at all.
This is an updated version of the first article published on July 18, 2019.
Author: Steven Pressman-Emeritus Professor of Economics, Monmouth University