What’s at Stake in the Debt Ceiling Showdown

In Brief

What’s at Stake in the Debt Ceiling Showdown

U.S. lawmakers are at loggerheads over raising the limit on government borrowing. Here’s what to know about the debate.

The debt ceiling is once again the subject of fraught discussions in Washington. After previous episodes threatened the United States with default, such brinkmanship could have dire consequences for the U.S. and global economy. Congress should eliminate the debt ceiling once and for all.

What is the debt ceiling?

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It is important to understand that the debt ceiling is not actually a limit on spending, but a limit on the Department of the Treasury’s ability to borrow money to pay the debt it already owes. This has its roots in World War I, when President Woodrow Wilson wanted Congress to authorize increased borrowing for the war effort. Congress passed the Second Liberty Bond Act of 1917, which established a limit, or debt ceiling, of $11.5 billion, with congressional approval required for any further increase. Congress has increased the debt limit dozens of times since then. 

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The last increase in the debt ceiling happened in August 2019, when Congress suspended the limit until July 31, 2021. Since then, the Treasury has been employing what it calls “extraordinary measures” to prevent a default, such as delaying payments to federal employees’ retirement accounts. At some point, however, these measures alone will not be enough, and the Treasury will run out of money. Secretary of the Treasury Janet Yellen recently warned that this could happen as soon as October 18. 

Senate Majority Leader Chuck Schumer makes a statement in attendance with Treasury Secretary Janet Yellen and U.S. House Speaker Nancy Pelosi (D-CA) before the start of a weekly news conference on Capitol Hill in Washington in September 2021.
Senate Majority Leader Chuck Schumer, Treasury Secretary Janet Yellen, and U.S. House Speaker Nancy Pelosi appear together at a weekly news conference on Capitol Hill in September 2021. Elizabeth Frantz/Reuters

Why does it matter?

If the debt ceiling is not increased, the United States will eventually default on its obligations, with catastrophic consequences. The credit rating of the United States would be downgraded drastically, and the ultra-low interest rates that the Treasury pays on its bonds to raise money—which reflect their status as the world’s safest investment—would rise sharply, triggering a spike in overall interest rates in the United States and around the world, and potentially causing a recession. Payments for social security and other critical benefits, as well as military salaries, would stop. A government shutdown would certainly allow the Treasury to temporarily delay the impact of an unchanged debt ceiling; however, prior experience has shown that a shutdown is painful to government employees and average citizens alike and would simply delay for a few days the inevitable need to restore the government’s ability to borrow to pay for spending that has already been approved by Congress.

The threat of a U.S. default has always made Congress ultimately agree on a deal to raise the debt limit. However, increasing political polarization and consequent brinkmanship have made a default a very real possibility in recent years. Even coming close to it can have consequences, as happened in 2011, when the credit rating agency Standard & Poor’s downgraded the United States’ credit rating amid a debt-ceiling standoff between congressional Republicans and President Barack Obama over the Affordable Care Act. 

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Do other countries have debt ceilings?

The United States is one of the few countries in the world with a debt ceiling. The only other major Western country to have one is Denmark, which has a much higher cap relative to its spending and has never been in serious danger of breaching it. 

The closest Denmark came to its ceiling was in 2010, when its debt approached 75 percent of the limit. Afterward, the ceiling was more than doubled. The United States by contrast comes dangerously close to breaching its debt limit every few years, and each time there is a game of political brinkmanship by one or both parties to extract concessions from the other side. 

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What happens now?

The United States could come just as close or even closer to a default this time around than it did in 2011, as Republicans have linked the debt ceiling to President Joe Biden’s big social spending plans and neither party has budged from its position so far. Yellen has been reaching out to Republican leaders to convince them to raise the Treasury Department’s limit on borrowing. There are some who believe the department could unilaterally mint a “trillion-dollar coin” to avoid default, but the White House has reportedly rejected this idea already—and rightly so, as it would be seen as a gimmick to avoid making the serious policy decision to attack this perennial problem.  

To prevent the nation’s obligation to pay its debt from becoming a political football, Congress should eliminate the debt ceiling completely, or at least tie it to spending such that the debt limit increases automatically whenever a spending bill passes. It is time for the United States to leave behind this antiquated mechanism that brings the country to the precipice of default every few years.

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