The United States will reach its statutory debt ceiling sometime between July and September unless Congress raises it. If the ceiling is reached, what happens next?
The answer depends on which economist you ask.
The Epoch Times spoke with four authorities, and their answers varied from mild repercussions to economic disaster.
How We Got Here
The debt ceiling is the statutory limit on the amount of debt the government is authorized to hold at any one time.It was established in 1917 when the country started selling war bonds to finance U.S. involvement in World War I and has been raised 78 times since 1960.
Since the mid-1990s, periodic debates have occurred about whether or not to continue raising the borrowing limit.
House Speaker Kevin McCarthy (R-Calif.) and President Joe Biden are currently negotiating over the debt ceiling. McCarthy has said the Republican-controlled House of Representatives won’t pass a spending limit without some agreement to cut future spending.
Biden has said he will not accept pre-conditions to raising the debt ceiling since it represents the full faith and credit of the United States.
The ceiling would have been reached on Jan. 19, but the U.S. Treasury took “extraordinary measures” to delay that until at least June.
The latest estimate from the Congressional Budget Office (CBO) is that the nation will reach the ceiling later this summer. Exactly when depends on how much tax money is received in the spring.
If the government does indeed hit the borrowing limit, the U.S. Treasury would have to start juggling bills. Some payments would be delayed, and the country might even default on its debt payments, according to the CBO.
Really, Really Bad
“The impact of the United States hitting the debt ceiling would be devastating,” Peter Earle, an economist at the American Institute for Economic Research, told The Epoch Times.“The first result would be a near-instantaneous lowering of the credit rating of the United States, which would, in turn, drive up the interest rate on outstanding U.S. Treasury bonds and make any planned Treasury sales much more difficult,” Earle said.
And that would be just the beginning.
“Stock markets would likely crash and the many financial institutions that keep U.S. Treasuries as collateral would be severely impacted,” Earle said.
After that, the government would either have to create more money in order to pay its bills, which could worsen inflation, or delay payments for some things.
The government now borrows about 20 percent of the money it spends. That equates to slowing down payments on more than $110 billion a month.
Both Republicans and Democrats have said they will not allow Social Security and Medicare benefits to be affected by the debt ceiling debate.
Yet those programs account for $2 trillion in annual spending, more than all discretionary spending combined, including national defense.
Yet the debt ceiling is not the real problem, according to some analysts. Out-of-control government spending is the bigger issue.
“The entire debate about the debt ceiling misses the larger reality that the nation’s current path is not sustainable,” E.J. Antoni, a research fellow at The Heritage Foundation told The Epoch Times.
“Both Republicans and Democrats have overspent and mortgaged our nation’s future into an over-leveraged position,” he said.
Antoni opposes raising the debt ceiling without making spending cuts.
“Blindly raising the debt ceiling is the equivalent of increasing the limit on a family’s credit card when that family is already hopelessly in debt, and not demanding any change in the household’s spending habits.
Really, Not That Bad
Other experts say reaching the debt ceiling would cause problems but not the catastrophic loss of employment and major recession that has been predicted, at least not in the short term.“It’s not a cataclysm, but it’s costly,” Louise Sheiner, policy director at The Hutchins Center on Fiscal and Monetary Policy, told The Epoch Times.
“At the beginning, it might mean that payments are late by a few days, which from an economic perspective is not a huge deal,” she said.
“People who are supposed to get their check on Monday might get it on Wednesday or Thursday.”
What happened next would depend largely on public perception, Sheiner believes. If the public had confidence that the impasse would be resolved within a few days, daily life would be unaffected for most people.
However, the longer the problem persisted, the worse it would become. Payments would get later and later, and people might begin to lose confidence in the government. That could cause more serious problems including recession.
Even that won’t necessarily happen, according to some experts.
“What will happen once we hit the debt ceiling? Well, Uncle Sam will delay payment on some of its debt. It doesn’t need to but it will,” Robert Kravchuk, a fellow at the National Academy of Public Administration, told The Epoch Times.
“In reality, the government doesn’t have to issue debt in order to spend money,” Kravchuk said. The government borrows to control interest rates and inflation, and to redistribute wealth.
As for the government going broke, it’s a logical impossibility.
Political, Not Economic Crisis
Some economists believe raising the debt ceiling should not be a big issue. The real problem, they say, is the debt ceiling itself.“The debt ceiling is just a number on a piece of paper,” Robert Kravchuk, a fellow at the National Academy of Public Administration, told The Epoch Times.
“But it’s a legal requirement, and it gives Congress an opportunity to do some political grandstanding relative to the executive,” he said.
“The thing is, it’s not an economic problem,” Sheiner said. “It’s not caused by it by any economics. It’s about some external political issue.”
Both Kravchuk and Sheiner believe the debt ceiling should be abolished.
Their rationale is that the money has already been appropriated by Congress so it must be paid. Therefore, arguments over raising the debt ceiling merely cause anxiety in the public.
Equating federal spending to a family budget is a false comparison according to Kravchuk.
“The household metaphor does not apply to the U.S. federal government. It’s not like balancing your family checkbook at all,” Kravchuk said because the federal government is monetarily sovereign. It can create money, which individuals and even state governments cannot.
“What is the government’s actual constraint on budget deficits or the national debt? It isn’t the ability to issue money. It’s the willingness of the American public to tolerate price inflation,” Kravchuk said.
“That’s the real upper limit. And it’s not an economic limit, it’s a political limit. It’s a social limit.”
Earle disagrees with the value of the debt limit. “I am not in favor of eliminating the debt ceiling,” he said.
“Where debt and deficits are concerned, I advocate for what has clearly become the unthinkable option: living within our means.”
