Advertisement
YOU ARE HERE: LAT HomeCollectionsObama

Just what is the federal debt ceiling?

President Obama and Congress are tussling over how to strike a deal to raise the federal debt ceiling. But what does the term 'debt ceiling' mean -- and what would happen if no deal is reached?

July 12, 2011|By a Times staff writer
  • Several factors have driven up the size of the deficit recently: the cost of the wars in Iraq and Afghanistan, the aging of the U.S. population and the recession.
Several factors have driven up the size of the deficit recently: the cost… (European Pressphoto Agency,…)

Reporting from Washington — Some questions and answers on the federal debt ceiling:

Question: Just what is the federal debt ceiling?

In 1917, as the U.S. entered World War I, Congress authorized the Treasury to issue long-term bonds to finance the war, but placed a limit on the amount of debt that the government could issue. That limit, known as the debt ceiling, has been raised repeatedly -- and lowered a few times -- since then. Congress often balks at raising the limit, and the confrontations are always worse when control of the government is divided between the two parties. The limit currently stands at $14.3 trillion dollars -- a ceiling that the government reached in May.

How much has the debt grown in recent years?

Economists usually measure the debt as a percentage of the overall size of the economy (the gross domestic product). The debt peaked at more than 120% of GDP at the end of World War II, then declined steadily and hit a low point of slightly more than one-third of GDP at the end of the Jimmy Carter administration. The debt then grew rapidly during the Ronald Reagan and George H.W. Bush administrations, peaked during Bill Clinton's first term at nearly 70% of GDP, and declined to less than 60% of GDP during Clinton's second term. The debt grew again to more than 80% of GDP during the George W. Bush administration and has continued to rise under President Obama to nearly 100% of GDP.

What has driven the debt upward?

In simplest terms, the government spends more than it takes in. The gap between spending and taxes is the budget deficit. To cover the deficit, the Treasury borrows money by issuing securities. When the deficit is large, the debt grows as a percentage of the economy. Several factors have driven up the size of the deficit recently. Among the largest: the costs of the Iraq and Afghanistan wars, which were financed with borrowed money; the aging of the population, which has increased the cost of programs for senior citizens; the rising cost of healthcare, which drives up the cost of Medicare and Medicaid; and the recession, which pushed down federal revenues and increased spending on economic stimulus and programs such as unemployment benefits.

When will the debt exceed the limit?

Treasury officials have estimated they will need additional borrowing ability by Aug. 2, although some experts in government finance think the actual date will be a few days later.

What happens then?

If Congress has not raised the ceiling, the Treasury cannot borrow more money. Because tax collections are less than the government's obligations, the government would not legally be able to pay all its bills.

What about just paying the highest-priority bills?

In August, the government is expected to collect about $172 billion in revenue and will face about $307 billion in bills, according to an analysis by the Bipartisan Policy Center, a Washington think tank. So, in theory, the government would have the money to pay a little more than 55% of its bills during the month. But which bills to pay? Interest on existing debt comes to just under $30 billion, Social Security checks are $50 billion, Medicare is another $50 billion, payments to military contractors for weapons, fuel and other costs comes to $32 billion and salaries for active-duty military personnel come to about $3 billion. Add in unemployment benefits ($13 billion for the month), and the government would already have run out of money without paying a single civilian employee or running any of its domestic programs, including courts, disaster relief, national parks, veterans benefits or welfare programs.

Would picking and choosing among programs be legal?

No one really knows. It would certainly be challenged.

Administration officials have warned of economic chaos. What's the basis for those fears?

The federal government has been able to borrow money at very low interest rates because investors around the world look at U.S. government securities as a very safe place to put their money. If the government's ability to pay its bills came into question, the people who buy bonds almost certainly would demand a higher interest rate. That would ripple quickly through the economy. In a letter to Congress and the president Tuesday, the Business Roundtable, Chamber of Commerce and other business leaders warned: "Treasury securities influence the cost of financing not just for companies but more importantly for mortgages, auto loans, credit cards and student debt. A default would risk both disarray in those markets and a host of unintended consequences."

How quickly might impact be felt?

Very fast. The Treasury has $100 billion in securities that come due on Aug. 4. Normally, Treasury would "roll over" the debt -- sell new securities to pay off the old ones. But if the bond markets are chaotic because of fears the government will not be able to pay its bills, that process could be much messier, and more expensive, than normal.

Are there other potential economic impacts?

No one knows for sure because the government has never hit the debt ceiling. But a sudden, 45% drop in government spending would certainly slow the economy if it lasted for any prolonged period.

What about the 14th Amendment? Would it allow President Obama to override the debt ceiling?

Again, no one really knows. The clause in question, adopted after the Civil War, says that "The validity of the public debt of the United States, authorized by law ? shall not be questioned." Some liberal commentators have suggested that the language would allow the president to override the debt ceiling. Others, including some prominent liberal constitutional law scholars, have said it means no such thing. Administration officials say that even if the argument survived a court challenge, the uncertainty in the bond market would cause chaos.

Advertisement
Los Angeles Times Articles
|
|
|