News Column

Everything You Need to Know About the Debt Ceiling

October 4, 2013

Adam Carlson, Columbus Ledger-Enquirer

economic numbers debt ceiling

Oct. 04--The federal government is entering the first week of its first shutdown in 17 years. Congressional members in both houses and from both parties seem locked into a struggle from which everyone is determined to emerge a "winner" -- language House Speaker John Boehner rebuked in a Friday press conference without also saying he was at all prepared to lose.

But another battle is looming: for months, lawmakers have been preparing to raise the debt ceiling as soon as the Treasury said it was necessary, or not raise the debt ceiling and default on the United States' bills.

Treasury Secretary Jack Lew said in a letter to Boehner that the Treasury will run out of money "no later than Oct. 17." The country has already actually hit the debt ceiling, back in May. Since then, Lew has been using what he described as "extraordinary measures" to keep the cash flowing. Those measures will be exhausted in less than two weeks.

At his Friday press conference, Speaker Boehner said he did not want to default, but he did not say that he would not default at the cost of all other political battles -- including, assumedly, the struggle over the implementation of the Affordable Care Act.

What does the debt ceiling mean? Why must it be raised? What will happen if it isn't? Here's what you have to know:

The debt ceiling is a mechanism by which Congress authorizes the Treasury to borrow money. The federal government brings in enough tax revenue to pay about 68 percent of its bills for the rest of October. It must borrow the rest in order to pay out the expenditures that have already been authorized by Congress. Thus, the debt ceiling does not actually prevent spending -- it only prevents borrowing money in order to pay back spending that has already happened.

Also important: most other Western democracies do not have a debt ceiling. We do; Denmark does.

By Oct. 17, the Treasury will have about $30 billion in cash on hand, which is far short of what is necessary to pay all of its debts, which include payments on Social Security, Medicare and a myriad number of Labor and Defense contracts. The Treasury must also make bond payments. Indeed, the global financial system is structured, in part, on the idea that Treasury bonds are some of the world's safest assets. Defaulting would turn that idea on its head -- and the system with it.

Some Republican Representatives have already said that default wouldn't, in fact, be apocalyptic -- that the Treasury indeed has enough cash coming in. This is true only if you accept the idea that the Treasury could prioritize which of its bills to pay and which of them to put off (if, for example, it had to only rely on tax revenue). This would mean that the Treasury could make its bond payments, for example, in order to prevent a global financial meltdown, while putting off less "essential" bills. (What would get put off? Defense contracts? Social Security? No one is saying.)

But the concept of "prioritization" is practically impossible -- the Treasury receives millions of invoices a day and pays them electronically -- and has already been dismissed by Secretary Lew.

The Bipartisan Policy Center estimates that the ceiling needs to be raised by $1.1 trillion, to a total of slightly more than $18 trillion, to cover the nation's bills through the end of 2014. President Obama has said he will not negotiate on raising the debt limit, as he did in 2011.

The president argues that his position is a fluke of contradictory Constitutional obligation: he cannot be required by Congress, on one hand, to spend a set amount of money; and then denied by Congress the ability to borrow enough money to do so.

One last point: Oct. 17 won't necessarily be the first day of default. But the Treasury will have to pay out $42 billion in Social Security and Medicare payments on Nov. 1 and without a ceiling increase by then, it will almost certainly default.

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(c)2013 Columbus Ledger-Enquirer (Columbus, Ga.)

Visit the Columbus Ledger-Enquirer (Columbus, Ga.) at www.ledger-enquirer.com

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Source: (c)2013 Columbus Ledger-Enquirer (Columbus, Ga.)


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