The US debt ceiling: everything you need to know


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WASHINGTON – As Congress continues to flirt with the idea of ​​not raising or suspending the nation’s debt ceiling, economists and scholars reconsider whether creative escape routes like a trillion dollar coin or appeal to the 14th self-inflicted economic calamity.

Republicans and Democrats disagree over whose responsibility it is to raise the country’s credit limit. Democrats insist that this be done bipartisan, reflecting the fact that both parties have incurred heavy debts in recent years. Republicans who voted to suspend the debt ceiling during President Donald J. Trump’s tenure now say they don’t need to help as the Democrats control all levers of power in Washington and prepare to push through trillions of dollars in new funding spend on your own.

All of this drama begs the question of what the debt limit really is, how it got here, and why the United States is not abolishing the debt limit entirely and saving the nation from its periodic confrontation with an economic time bomb.

The debt limit is an upper limit for the total amount of money that the federal government can borrow to meet its financial obligations. Since the United States has a budget deficit – that is, it spends more than it brings in through taxes and other revenues – it has to borrow huge sums of money to pay its bills. This includes the funding of social safety net programs, interest on the national debt and salaries for troops. While the debt ceiling debate often prompts legislators to cut government spending, lifting the debt ceiling does not allow new spending, but only allows the US to fund existing commitments.

Tech-wise, the United States hit its debt limit in late July after Congress approved a two-year extension in 2019. Treasury Secretary Janet L. Yellen has since taken “extraordinary measures” to delay a default. These are essentially financial accounting tools that curb certain government investments so that the bills can continue to be paid.

The non-partisan Policy Center estimates the Treasury Department will really run out of money sometime between October 15 and November 4. However, it is harder to predict what is known as the “X-Date” because of all of the pandemic aid the government is distributing and uncertainty about how much tax revenue will come this fall.

National debt is now $ 28.43 trillion, according to the Peter G. Peterson Foundation live tracker. The current borrowing cap is $ 28.4 trillion, which leaves negligible margin for the federal government.

To give an idea of ​​the extent of such a deficit, the total US gross domestic product was $ 20.93 trillion last year.

The constitution requires Congress to approve the borrowing. The debt limit was introduced in the early 20th century so that the Treasury Department would not have to ask for permission every time it had to issue bonds to pay bills. The first debt limit was set under the Second Liberty Bond Act of 1917, according to the Congressional Research Service. In 1939 a general limit on national debt was introduced.

Denmark also has a debt ceiling, but it is set so high that raising it is generally not a problem. Most other countries don’t. In Poland, the national debt must not exceed 60 percent of the gross domestic product.

For many years raising the debt ceiling was routine. But as the political environment has become more polarized, the bells and whistles have increased beyond the debt ceiling. The House used to apply the “Gephardt rule”, which provided for an increase in the debt ceiling when a budget decision was made, but which was largely abolished in the 1990s.

During the 2011 debt ceiling battle, some argued that President Barack Obama had the power to unilaterally lift the debt ceiling. Former President Bill Clinton said at the time that if he were still in office he would invoke Amendment 14, which says that the validity of US debt cannot be called into question, raise the debt ceiling itself and the Courts would force him to stop.

Mr Obama and his lawyers disagreed and decided against this approach. After leaving office, Mr. Obama admitted that he and Treasury officials had considered several creative contingency plans, such as minting a $ 1 trillion coin to pay off some of the national debt. In a 2017 interview, he described the idea as “crazy”.

The lack of a replacement is one of the main reasons for the debt ceiling to persist. The US could follow the Danish model and raise the debt ceiling stratospheric high. Some have also suggested that it could also force the limit to be raised in lockstep with new means.

Few legislators from either party can vote on the debt ceiling, and the default caused by not raising it would lead to economic disaster. With political polarization in the United States showing no sign of subsiding, it often seems that the risk of accidental default outweighs the fiscal responsibility encouraged by the debt ceiling.

However, it would require an act of Congress to lift the debt ceiling and it is never easy to find an agreement there.

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