The U.S. debt ceiling may seem an arcane, boring subject, but what will happen to all of us if Congress fails to raise it and the country defaults could not be more dramatic.
The debt ceiling is the limit on the amount the government can borrow. It was enacted in 1917 to finance the country’s entry into World War I and originally limited U.S. bond indebtedness to $10.5 billion. The debt ceiling has been raised many times, usually on a bipartisan basis, including several times during the Trump administration. It currently stands at about $31 trillion.
Contrary to common misconceptions, the debt ceiling is not about government spending. In December 2022, Congress passed an omnibus spending bill to fund the government to September 2023. A compromise, it contained several provisions demanded by Republicans as the price of supporting the bill. For example, defense spending was increased beyond the Biden administration’s request, and the bill required the military to stop mandating Covid vaccination for its personnel.
The debt ceiling limits the ability of the government to pay its bills by borrowing. If Congress refuses to raise the ceiling, the U.S. would be unable to pay interest and principal on outstanding Treasury notes. That would be like refusing to pay your mortgage because you think you have too much debt. The bank doesn’t care what you think. If you stop making mortgage payments, it will foreclose.
What else could the government not pay if the debt ceiling isn’t increased? Everything: Social Security, Medicare, the salaries of government employees and members of the military, veterans’ benefits. The list is long.
The near default in 2011 gives a pretty good indication of the economic and social consequences. The government would be forced to shut down, the stock and bond markets would tank, the bond rating agencies would downgrade U.S. securities (this actually happened in 2011), and a worldwide financial panic would ensue.
Here on Cape Cod, retirees’ 401(k) and I.R.A. savings would shrink drastically, and they would not receive Social Security checks.
Any such default would likely be very brief because even the nuttiest member of Congress would be faced with armies of angry constituents. But the world would change because everyone would see that the full faith and credit of the U.S. are subject to the whims of a small, nihilistic faction. Who would continue to trust us?
How can this catastrophe be avoided? The simplest way is to increase the debt ceiling, but that would require at least some Republican members of the House to defy their leadership and vote with the Democrats. A second way is for the Biden administration simply to ignore the debt ceiling, relying on the 14th Amendment, which says that the validity of the public debt of the U.S., as authorized by law, “shall not be questioned.” While a good Constitutional argument can be made on these grounds, if the president ignored the debt ceiling legal challenges would probably paralyze any effort by the Treasury to sell U.S. bonds.
Several accounting tricks have been proposed to circumvent the debt ceiling, but they are just that, tricks, and not a long-term solution. Treasury Secretary Janet Yellen is already using “exceptional measures” (stealing from Peter to pay Paul) to stave off a default until June. This is just a stopgap.
Finally, the crisis could end with a negotiated deal with the Republicans, which is how the 2011 near default was averted. President Biden should take Speaker Kevin McCarthy up on his offer to negotiate and make him state on the record his party’s demands, which would likely include major cuts to Social Security, Medicare, Medicaid, and other popular programs. This would allow the president to take his case to the public by showing what the Republicans are actually asking for. Could McCarthy and the Republican Party stand the heat? Only time will tell.
Stephen Greenberg of Wellfleet is a retired attorney.