If you google the terms “debt limit” or “debt ceiling,” both of which have the same meaning, you will find references to political grandstanding over the issue at many times in the past. You will likely also find several articles describing a looming debt ceiling showdown in congress in 2023.
“The debt ceiling, debt limit or statutory debt limit is the total amount of money the U.S. Treasury can borrow,” according to Market Business News. “If the government does not have enough money from taxes, it needs to borrow to pay its bills.” When the government is in a situation where the money going out exceeds the money coming in during a given period, it is said to be running a budget deficit. (source: https://marketbusinessnews.com/financial-glossary/debt-ceiling/, https://fiscaldata.treasury.gov/americas-finance-guide/national-debt/)
According to the U.S. Treasury department, the U.S. government has only run a surplus five times in the last 50 years, most recently in 2001, meaning that it has run a deficit in 45 of the last 50 years. “To pay for government programs while operating under a deficit, the federal government borrows money by selling U.S. Treasury bonds, bills, and other securities. The national debt is the accumulation of this borrowing along with associated interest owed to investors who purchased these securities. Simply put, the national debt is similar to a person using a credit card for purchases and not paying off the full balance each month. The cost of purchases exceeding the amount paid off represents a deficit, while accumulated deficits over time represent a person’s overall debt.” (Sources: https://fiscaldata.treasury.gov/americas-finance-guide/national-deficit/, https://fiscaldata.treasury.gov/americas-finance-guide/national-debt/)
The U.S. national debt in 2003 was just under $11 trillion in inflation adjusted dollars. In the last 20 years, the debt has nearly tripled to over $31 trillion. Because these figures are so large, they are difficult for the average person to comprehend. To put these numbers into perspective, the following three bullets refer to an example Joe From Texas utilized in a previous post. (Source: https://fiscaldata.treasury.gov/americas-finance-guide/national-debt/)
We often hear the term billions, and even trillions, when discussing government spending. These are big numbers that we usually don’t really think about, but let’s try to put into context what it would be like if we owed someone a billion dollars, or even a trillion dollars.
Suppose your goal is to accumulate a billion dollars and you decide to save $100 per day toward this goal. How long would it take you? Assuming you earned no interest on the money, it would take you 27,387.26 years. In other words, you would never get remotely close to obtaining your goal in your lifetime. According to UC Berkeley, “Nor would your children, grandchildren or great grandchildren. If you, and one descendent per generation, saved $100 every day, and each of you lived for 90 years, it would take you and 304 generations of your descendants to save up one billion dollars.” (source: https://ucmp.berkeley.edu/education/explorations/tours/geotime/guide/billion.html)
If you think a billion is a big number, a trillion is 1000 times more. The following from CNBC.com puts this into perspective. “Here’s one way to think of it: a trillion is a million million. If you paid out $1 per second, to settle a $1 million debt would take less than 12 days. To pay off $1 billion would take 32 years. Paying off $1 trillion at a dollar per second? Nearly 32,000 years.” (source: https://www.cnbc.com/2012/02/13/putting-trillions-of-dollars-in-perspective.html)
Federal Spending and the Debt Ceiling
“How much money is needed to fund the essential functions of the federal government?” is a question that Joe From Texas has heard asked on numerous occasions. The answer is that no one really knows because the range of what constitutes essential functions generally varies from person to person. However, there are two things that a majority of Americans agree on - they don’t trust the federal government, and they believe it is too big.
“A majority of voters now fundamentally believe that the very federal government which exists to serve and protect citizens is no longer on their side. They see the government as too large, too invasive, and as an obstacle to their living the American dream,” said Mark Meckler, former CEO of Parler and President of Convention of States Action, which funded a poll on citizen views of government in July 2022. (https://wisconsinspotlight.com/poll-federal-government-too-big/)
A Pew Research poll conducted in June 2022 demonstrated just how low that trust in the federal government has fallen. According to Pew, “only two-in-ten Americans say they trust the government in Washington to do what is right ‘just about always’ (2%) or ‘most of the time’ (19%).” (https://www.pewresearch.org/politics/2022/06/06/public-trust-in-government-1958-2022/)
Joe From Texas believes that federal spending and the debt ceiling are very much related to the poor view that most Americans have of their government. Two examples can be found in the recent $1.7 trillion spending bill that passed congress at the end of 2022, with Democrats being joined by some very misguided Republicans in the U.S. Senate to assure passage. First example: while the Biden Administration will do nothing to secure our southern border, the recent spending bill included $410 million to “remain available” to reimburse Jordan, Lebanon, Egypt, Tunisia, and Oman for “enhanced border security.” Second example: the bill allocated another $45 billion to Ukraine, bringing total U.S. aid to Ukraine over the past year to an astounding $111 billion. (source: https://www.breitbart.com/politics/2022/12/23/18-wasteful-items-1-7-trillion-spending-bill-millions-lgbt-projects-border-security-other-countries/)
As you may have guessed, the U.S. is not expected to run a budget surplus this fiscal year, so this means the U.S. government is borrowing billions of dollars on the backs of U.S. taxpayers to fund priorities that will not benefit these taxpayers. Instead, the benefits will go to other countries.
All of this brings us back to the question of what would happen if congress failed to raise the debt ceiling? The short answer is that the government would not be able to borrow any more money and would only be able to make payments as funds come into the treasury.
Although this may sound harmless enough, many believe this would lead to disastrous circumstances. For example, both Forbes and CBS are among those who believe that failure to raise the debt ceiling would be catastrophic. A CBS article states, “if the U.S. government cannot pay its bills, millions of Americans would be affected. Social Security payments would not go out; U.S. troops and federal civilian employees would not be paid. Veterans could see compensation or pension payments lapse. And millions of Americans on food assistance would see benefits stop.” Additionally, there is a significant risk that the government would default on debt payments to creditors. (Sources: https://www.forbes.com/sites/beltway/2013/10/08/actually-the-united-states-has-defaulted-before/?sh=79d442426021, https://www.cbsnews.com/news/debt-ceiling-limit-congress-united-states-economy/)
Peter Morici, an economist and University of Maryland emeritus business professor, appeared to have a different view in a column he wrote for the Washington Times in 2021, the last time the debt ceiling was up for debate in congress. “If Congress does not raise the debt ceiling, the Treasury will have money—just not enough for everything. It could prioritize interest on the national debt, social security benefits, the military, Medicare, Medicaid and other benefits for mothers and young children. Federal law enforcement and prisons would need funding. Still, the bureaucrats at the FTC and Justice Department Antitrust and Civil Rights Divisions could be furloughed—along with most other government agencies. How pleasant it might be for local school boards, universities, and state governments to not receive new mandates from Washington for the duration,” said Morici. It should be noted that Morici appeared to clarify toward the end of the piece that he was arguing for the use of the debt ceiling debate as an opportunity to bring some fiscal sanity to Washington, as opposed to arguing against raising the debt ceiling. (source: https://www.washingtontimes.com/news/2021/nov/23/failure-to-raise-the-debt-ceiling-neednt-cause-a-g/)
According to reports, House Republicans intend to use the upcoming debate over the debt ceiling as an opportunity to address spending cuts and priorities. In a 2022 interview prior to the midterm elections, then House Republican leader and now Speaker Kevin McCarthy confirmed that spending cuts would be part of any discussion to raise the debt ceiling. “You can’t just continue down the path to keep spending and adding to the debt,” he said. (source: https://www.washingtonexaminer.com/restoring-america/faith-freedom-self-reliance/lawmakers-headed-partisan-standoff-debt-limit-2023)
Conventional wisdom states that the U.S. government has never been in default on debt payments. However, in 2013, a Forbes article outlined a situation in 1979 when the government temporarily defaulted on some Treasury Bill payments “in the wake of a debt limit showdown.” Forbes describes the default as “small” and “unintentional” but says it was still a default and it cost the U.S. more in interest payments for the next several months. Although this default was very limited, “it’s the only data point we have on a U.S. default. Not surprisingly it shows that even a small, temporary default is a bad idea. Our leaders shouldn’t come close to risking it.” (source: https://www.forbes.com/sites/beltway/2013/10/08/actually-the-united-states-has-defaulted-before/?sh=79d442426021)
Like most Americans, Joe From Texas agrees that our government is out of control and must be reined in. He commends those Republicans who are dedicated to work towards bringing some sanity back to spending—including using the debt ceiling debate as an opportunity to negotiate. The chances of success will depend on a well thought out strategy that considers every possible move by the Democrats and anticipates how Republicans will react to those moves. If they are successful, we will all benefit. However, the stakes in both economic and political terms are very high. At the end of the day, refusing to raise the debt ceiling does not appear to be a viable option. Republicans must recognize this in advance and plan accordingly. Because they control the House in the new congress, they have the power on a daily basis to attack spending, and there are certain to be many opportunities for show downs that they can win. With regard to the debt limit, they should only engage in this particular battle at this time if they can identify up front what success will look like and how they plan to achieve it. At the end of the day, the American people will judge them on their effectiveness at bringing sanity back to government rather than the number of fights they engaged in and lost. During the next election, the American people will be interested in hearing from those seeking re-election “here is what we accomplished,” rather than “here is what we tried to do.”