When the Debt Hits the Ceiling


Last Thursday, October 17th, Democrats and Republicans were able to come together to fund government and raise the debt ceiling. However, the showdown could repeat itself in just four months, on February 7th, when the nation’s borrowing limit is reached and the Treasury resumes “extraordinary measures” to keep the checks flowing. Yet even after the most recent face-off, few people seem to know what the debt ceiling actually is or what will happen if we ever reach that limit.

Simply put, the debt ceiling is the maximum amount government is allowed to borrow. Think of it as the limit on your credit card. Hitting that limit does not mean government can’t spend the money it has or the money it receives in the future. Nor does it mean they can’t pay off the interest on the national debt. Not raising the debt ceiling simply means that government has to actually, unprecedentedly, spend only what it has. As crazy as this concept may seem, everyone except Congress, Wall Street, and others “too big to fail” accepts that this is just how the world works. How convenient would it be to just arbitrarily tell the bank how much credit (debt) you were going to allot yourself that year, on top of all the existing debt on which you consistently pay only the interest? In 2006, when the Bush administration sought to raise the debt limit and Congress showed no sign of objection, then-Senator Barack Obama made an impassioned plea against such “reckless fiscal policies”. “Increasing America’s debt weakens us domestically and internationally,” Obama concluded. “America has a debt problem and a failure of leadership.”

Now, what does everyone mean when they talk about default? Just like everyone else, the government is required by law to pay its bills. (Unlike everyone else, Congress doesn’t lose anything if it fails to meet their obligations.) To default means to not make your payments, in this case, not pay off the interest on the national debt. We will now debunk the “default” myth, so that while the politicians throw around scripted sound bites that shake the stock markets, you can rest assured that raising the debt ceiling isn’t inherently causing us to default on our obligations to bondholders.

The fourth section of the 14th Amendment to the Constitution states: “The validity of the public debt of the United States, authorized by law … shall not be questioned.” In other words, the President and Congress are already bound by the supreme law of the land to pay not only the interest on the debt, but eventually, the debt itself. That may seem like a distant possibility, but for better or for worse, we are just as obligated to pay the debt now as we ever will be – it’s just a matter of which bills Washington decides to pay with the money we have.

If the government defaults, it is because they choose to default. Math shows us why (if you want to follow along, you’ll need to open whitehouse.gov and grab a calculator). According to the official White House budget, the national government is expected to collect 3 trillion dollars’ worth of taxes in the fiscal year 2014, while the total 2014 interest payment on the national debt is estimated at $223 billion. Even Washington should be able to make it to the bank with that much in hand.

But the government would be able to do more than that. The White House is budgeting $860 billion for Social Security, $524 billion for Medicare, and $304 billion for Medicaid for 2014. If you’re following along, that puts us at $1.9 trillion in outlays. Add in the whopping $618 billion allocated to defense, and we reach $2.5 trillion in government spending. That leaves us about $500 billion for what we will lamely dub “other” government programs.

Now, obviously there will need to be substantial cuts made to balance the budget. We neglected to include the estimated $624 billion in non-defense discretionary spending or the other $621 billion destined for “other mandatory programs.” Some will have noted that the Affordable Care Act (“Obamacare”) was not part of our calculations. Nevertheless, by prioritizing and by drastically cutting back on defense spending and payments to institutions such as the Department of Education ($71 billion), Homeland Security ($39 billion), and Health and Human Resources ($78 billion), we can balance the budget and lay the foundations of a sustainable financial base.

After talking about spending hundreds of billions of dollars, these may not seem like cuts big enough to make a difference, but government spending on programs other than those we have already accounted for (such as Medicare and Medicaid) is spread out over a large number of agencies, programs, and foundations. There will have to be across-the-board cuts to the bureaucratic leviathan before we break even. Though some of these cuts would inevitably be called radical or heartless, we must ask whether paying our citizens with borrowed or inflated money is really nobler than telling them we cannot afford their services.

But won’t hitting the debt limit will hurt the nation’s credibility and therefore, the economy? As much as the media insists that Standard and Poor’s 2011 downgrade of US credit from AAA (Outstanding) to AA+ (Excellent) was due to Republicans’ unwillingness to raise the debt ceiling, the S&P report, published 4 days after the raising of the debt ceiling, never mentions the issue. Rather, the report sums up its rationale as the following: “Because the U.S. has, relative to its ‘AAA’ peers, what we consider to be very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable.” S&P’s criticisms indicate that our credibility rests on the reduction of our outstanding debt, not on its expansion.

In short, in spite of the apocalyptic jargon employed by pundits and politicians, hitting the debt ceiling may be beneficial in so far as it forces the federal government to look at the price tag – and maybe even shelve a few items – before proceeding to the checkout line. This policy shift would come at a most opportune moment, as the shopping spree of the last century makes its exit with terrible gusto. The percentage of federal debt held by the public, currently 73% of GDP, will reach 100% of GDP by 2038. Medicare and Medicaid expand and Social Security bankrupts the nation as the current working force struggles to support the baby boomers. Undeclared “preventive” wars continue to put both our physical and fiscal power in jeopardy. As always, the Federal Reserve provides the necessary funding via the printing press, inflating the currency and slowly turning the dollar into Monopoly money. While these harsh realities have done little to spark lasting policy change, hitting the debt ceiling, like the shutdown, would force us to re-evaluate the role of government and decide which programs we can fund and which we cannot. It could well be our last wake-up call.


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