The United States is once again flirting with a default crisis. The clock is ticking on a deal to raise the federal borrowing limit, or debt ceiling, and prevent a default on the national debt. After months of wrangling, Congress struck a short-term deal to temporarily avoid a first-ever default, but it sets up another showdown in a matter of weeks.
The recent legislation raised the nation’s borrowing limit by $480 billion, the amount the Treasury Department said it needed to meet the country’s cash needs until Dec. 3, setting up yet another deadline for Congress to resolve the issue.
The debt ceiling, also known as the debt limit, is the maximum amount of money the feds can borrow cumulatively by issuing debt in the form of bonds to meet its obligations.
The fight over the federal debt ceiling is Kabuki theater in the city of sound and fury. Tracing its origins to the 17th century, Kabuki is the stylized Japanese drama in which performers wear elaborate make-up and costumes. Actions aren’t literal but metaphorical, conveyed through singing, dancing, and mime.
In Washington, D.C. the Kabuki theater of America’s debt ceiling is a debate with overheated rhetoric and extravagant gestures, as politicians of both parties engage in the silly debt ceiling dance until the 11th hour, when each gives ground to save face, resolves the standoff and avoids a default just in the nick of time.
A default would be a catastrophic blow to the economic recovery from the COVID-19 pandemic. Global financial markets would be disrupted, and Americans would pay for this default for generations, as global investors would come to believe that the federal government’s finances have been politicized and they are not going to get paid what they are owed. Going forward they would demand higher interest rates on the Treasury bonds they purchase.
Congress enacted the debt ceiling in 1917 to placate anti-war lawmakers who were uncomfortable about letting the Treasury Department borrow too much money to finance World War I. Since then, the limit has been raised or modified 98 times according to the Congressional Research Service. Yawn.
It’s a mechanism that allows the U.S. Treasury to borrow money for any approved spending up to a certain limit without first getting approval from Congress. Lifting the debt limit does not initiate any new spending. Rather, it simply allows the U.S. to finance obligations already authorized by Congress, including interest on the debt and payments to Social Security, Medicare, and Medicaid.
There have been regular congressional battles over the debt ceiling. Despite partisan disagreements, Congress and the President have never allowed the country to default on its debt. During the Obama administration in 2011, when Republicans refused to raise it without significant spending cuts, a deal was finally struck to resolve the debt ceiling issue. But coming within days of the Treasury being unable to pay out certain benefits did lead to Standard & Poor’s to strip the U.S. of its triple-A credit rating for the first time in history.
There were also government shutdowns in 2013 and 2018, when the government closed non-essential services, such as national parks, and sent federal employees on forced leave. President Trump’s demand for $5.7 billion to build a wall on the Southern border led to a 35-day shutdown in 2018.
If the debt ceiling is not raised and the government can’t borrow to pay the bills, it would have to suspend certain pension payments, withhold military and federal workers’ pay, and delay interest payments on outstanding debt, potentially roiling financial markets and raising borrowing costs.
But not to worry, Americans have seen this movie before. The debt ceiling will be raised, and the government will not default. After all the Sturm and Drang, all will be fine after Democrats and Republicans have used it to embarrass one another and seize some electoral advantage.