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What is the Debt Ceiling?
The Debt Ceiling
What is the debt ceiling?
The debt ceiling is a limit set by congress on the amount of money the federal government can borrow. The ceiling applies to debt owed to the public, e.g., anyone who buys U.S. bonds, plus debt owed to federal government trust funds including Social Security and Medicare.
The first debt ceiling limit was established in 1917 and was set at $11.5 billion. It was used to finance the U.S. entry into WW I. Congress gave the Treasury Department authority to borrow money as needed.Previously, Congress had to sign off every time the federal government issued debt.
How is the Ceiling Determined?
The debt ceiling is similar to purchasing with a credit card. But if the limit does not cover the amount of debt incurred, the holder of the card asks for the credit limit to be raised to cover the new debt. Each time congress votes to hike spending or cut taxes and does not pay for those initiatives, it impacts the debt ceiling. Thus, causing the need for the debt ceiling to be raised in the future.
What happens if Congress Doesn't Raise the Debt Ceiling?
The Treasury is not be able to borrow any more money and the government falls short of what it needs to pay all its bills in full. This includes funding government operations and paying creditors and contractors.
Congress could immediately trigger spending cuts or tax increases that would more than likely cause serious economic problems Or they could default on obligations with the risk of crippling the economy and sending global markets into financial chaos.
What did the Super-Committee in 2012 have to do with this?
The following paragraphs describe the events of the debt ceiling debacle in 2012.
Because of bipartisan bickering as to whether lower taxes and cut spending or raise taxes and increase spending, Congress established the Budget Control Act.
This empowered a Super Committee comprising representatives of both parties to negotiate how to achieve at least $1.2 trillion of debt reduction.
Was the Super Committee Successful in 2012?
No - The committee agreed to disagree and as a result, it triggered almost $1 trillion in automatic federal spending cuts, These cuts include defense as well as non-defense spending that will take effect in January of 2013. Non defense spending pays for many popular government agency that ensure our well being, such as FDA, USDA, FAA and many others.
This bipartisan bickering also caused the S&P bond rating agency to downgrade government bond ratings from AAA to AA+.
Update 5/5/2013, The Sequester
It's been almost a year since I published this hub. Little did I know what I was describing in the above paragraphs would lead to the budget cut Sequester enacted on March 1, 2013. The reductions are supposed to be $84.4 trillion in 2013 with similar cuts scheduled for 2014 to 2021. The cuts are supposed to be spread evenly between defense and non-defense spending.
Major programs like Social Security, Medicaid, federal pay (including military pay and pensions) and veterans' benefits are exempt. Medicare spending will be reduced by 2% per year. The largest impact we have seen so far this year is created by the delays in air traffic created by furloughing air traffic controllers. However, congress was quick to fix that when their flights were delayed while they were going home for spring break. They somehow found the funding by robbing Peter to pay Paul to reinstate the air traffic controllers.
Update March 16, 2015
Below is a copy of a letter from John Lew, the current Treasury Secretary to John Bohener, the current Speaker of the house.
So arguing over the debt ceiling is academic. It's like arguing if the barn door should be closed after the horse has left the barn. It is essentially arguing over whether to pay the bills the country has already incurred and which Congress has already approved.
Since March 1962, debt ceiling increases have been enacted 76 times. According to the Congressional Research Service.Congress has voted to raise the ceiling 11 of those times since 2001. If my math is correct that's once each year! The ceiling is currently set at $18.394 trillion. Treasury Secretary John Lew estimates that U.S. borrowing could hit the debt ceiling by the end of 2015.
I have learned a lot from this research, as I hope you have. This begs the question is congress going to perform this political theater, each time it is necessary to raise the debt ceiling. Will there be another super-committee convened? Does congress use the debt ceiling as a political football? Will the credit rating agencies downgrade U.S credit if an impasse is reached?..Stay tuned to find the answers.
(This reminds me of when my Mother used to listen to a soap opera on the radio called Portia Faces Life. It would always end with the question. "Will the little girl from the mining town find love and happiness with the rich and handsome lord Henry Bently?")...Thanks for listening!