Understanding the Debt Ceiling Battle of 2013
First, understanding what the Debt Ceiling actually is
Before we can go further in depth about the political ramifications to not lifting the debt ceiling, we must first define what it is and what its original intent was.
The Debt Ceiling was originally instituted during World War I as a means to allow the Treasury to not have to come to Congress every time it needed more money. Now, over the past 9 or so decades, the Treasury has reached this Debt Ceiling from time to time. Congress would then vote to raise it a certain amount, thus allowing the Treasury to continue to borrow money. This wasn't a crazy occurrence until very recently in 2011, when the GOP used the Debt Ceiling as leverage to extract over a trillion dollars in cuts from the President.
So, what makes the 2013 Debt Ceiling fight different from the 2011 one?
So, now we know the how and why the Debt Ceiling came into existence. So, why is it so controversial to raise it again? Simply put, it has become a bargaining chip for the GOP members of Congress. They threaten to not raise it, which would cause the U.S to default on its debt for the first time. This, of course, frightens the Democrats into conceding to large spending cuts.
This time is different for a couple reasons:
1) Obama is more confident in negotiations now that he has been re-elected for a second term.
2) Many moderate Republicans have already said that default is not an option, which weakens the leverage that Congressional Republicans have, which entirely rests on the thought that they would allow the country to default. Actually, on the date of this publication (1/18/2013), it is reported that House Republicans will vote to raise the Debt Ceiling for 3 months.
What are the potential consequences to not lifting the Debt Ceiling?
For starters, the U.S credit rating (on government bonds) of AAA could be downgraded. Standard and Poors downgraded the U.S credit rating to AA+ as a response to the inaction of Congress back in 2011, even before the Debt Ceiling was reached. The other two major ratings agencies, Moodys and Fitch, could possibly downgrade the U.S credit rating, even before the U.S defaults.
The scary thing about the Debt Ceiling is that even most politicians and economists can't say for certain what would happen if the U.S defaults. Credit markets could dry up. Lending could halt to a stop. The government would shut down. Social Security checks (and other entitlement programs) could stop being sent out. The consensus is that it would be very, very damaging to a very frail economy that is currently in the process of a slow recovery.
So, what will come out of the 2013 Debt Ceiling battle?
Of course, what I write here is complete speculation. But, here is what I think will happen.
Obama will get his way partially, and the House Republicans will vote to raise the Debt Ceiling temporarily (most likely for the 3 months, as it was reported), as they don't want to be blamed for causing the country to default, just so they could extract some cuts to entitlement programs from the President.
In the end, there will be a comprehensive package that will include large spending cuts and perhaps some revenue increases (from tax reform, including closing loopholes and ending deductions for the rich). They might have to pass this large bill in parts, which would make it easier to pass.
But, I see the President getting his way and the Debt Ceiling will not be able to be used as leverage, to a certain degree.