Topic Analyses

What Reaching the Debt Ceiling Really Means

The debt ceiling, a primary cause of debate for partisan politics, was reached over the past week. In this topic analysis, Akshita Krishnan talks about what this means for the economy and American politics.

If there’s anything scarier than the name “doomsday,” it’s “X-day,” the label that Treasury Secretary, Janet Yellen, has given the day that the US defaults on their debt. Yikes.

If you’ve been keeping up with the news, you know the United States has reached the agreed debt ceiling. Many economists and policy makers fear that this will spiral into the nation defaulting on its debt—but before we really get into the implications of reaching the debt ceiling, let’s understand what it actually is.

Back in 1917, Congress created a cap on the amount of debt the nation is allowed to incur, which determines the amount of money that we are allowed to borrow. Theoretically speaking, as the Council on Foreign Relations reports, it is an arbitrary number that doesn’t have a technical limit: in other words, Congress can extend it as much as they want, regardless of how much debt we accumulate. (For reference, the debt ceiling has been increased 78 times since 1960, even though, since 2013, Congress has voted to suspend the debt ceiling 7 times.

That said, however, the problem is that the United States has had a deficit spending crisis for quite some time now, which essentially means that we borrow money consistently to pay for services as passed by Congress and the President.This is because we make less money (through taxes and other forms of government revenue) than we spend. If we didn’t continue to borrow money, critical programs like Social Security and Medicare would have to be shut down because the government does not have money to pay for them. 

Anyways, this is why reaching the debt ceiling is such a problem. In December of 2021, it was extended to $31.4 trillion, which, due to major pieces of legislation like the Inflation Reduction Act, was hit on January 19th, as reported by Al Jazeera

This begs the question…What Happens Now?

There’s a couple of things that could potentially happen, but the most severe consequence of this would most likely be the US defaulting on its debt. At the most basic of definitions, a debt default occurs when someone (in this case, the US government, which for the purposes of debt is treated as a single entity), misses a payment on their debt, which is exactly what being unable to continue to borrow would lead to. And yes, the US government has to borrow to pay back money they borrowed—it is a cycle that will continue until they can make a surplus on their revenue. 

To help combat the negative consequences that would inevitably arise from this, Treasury Secretary Janet Yallen stated that the government would have to take extraordinary measures to ensure that a default will not occur, at least until June of this year, presuming that Congress raises the ceiling again by then. 

Herein lies the problem: the only way to ensure that the US will not default on its debt is making sure that we cut back on our spending. But the first programs usually cut are the ones targeted at people in need.For example, as the Associated Press reports, a program that was recently suspended was the reinvestment of government bonds into a savings plan for government workers. 

But, this is only the start to a slew of negative impacts that would come from failing to  raise the debt ceiling. 

To understand the consequences of debt defaults, outside of speculative concerns, we can turn to Sri Lanka. They defaulted on their debt in May of 2022 and ever since then, it has spelled a crisis for the country. 

Now you might be thinking that the simplest solution to this is to just raise the debt ceiling, but this is where American politics come into play: Republicans are using this state of limbo  as an opportunity to advance their agenda to promote lower spending, a move that puts the US’ fiscal policy in jeopardy. Recently, there have been constant fights in Congress over the debt ceiling, and Republicans often make the assertion that the rising debt ceiling should signal to Democrats that the amount of money they spend needs to be curtailed, even though the Democrats hold increasing the debt ceiling as a non-negotiable move. 

It’s essentially a tug of war with no end.

Anyways, it is important to note that the implications and the destruction of defaulting on debt is a potential consequence, not one that has been agreed upon entirely just yet. There is still a chance for the nation to never hit X-day.

Leave a Reply