Money Mondays: Should You Care About The Debt Ceiling?

Tom: This morning, we are talking debt ceiling, correct?

Mellody: We are, Tom. It may seem like déjà vu all over again, but the debt-ceiling squeeze is back. Treasury secretary Jack Lew has said that the debt ceiling needs to be raised in two weeks, by November 3. As you know, the last few times that this issue has come up, it has been a huge point of contention in Washington, and it has often come down to the wire or resulted in a government shutdown. So this morning, before the battle is engaged (again), I wanted to run through a short primer on the debt ceiling for our listeners, to get them up to speed and let them know how they may be affected.

Tom: OK! First things first, tell us what the debt ceiling is?

Mellody: The debt ceiling is simply the limit set by Congress on the amount of debt that the U.S. Treasury can issue.

Last year, Congress voted to suspend the limit and allow the Treasury to issue debt for the government to operate on until mid-March of 2015. The prior limit of $16.7 trillion was then recalculated to include the new debt. When it was recalculated on March 16, the limit was reset at $18.1 trillion. Now, Congress needs to lift that ceiling to enable to government to continue business as usual.

Tom: Is the debt ceiling lifted for future spending?

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Mellody: Great question! A lot of the fights in Washington have seemingly centered the fact that lifting the debt ceiling will force spending cuts. Because of this, congressional efforts to lift the debt ceiling in the last few years have become difficult votes for some lawmakers because they are viewed as one way to force fiscal restraint. If your bank doesn’t increase your credit card limit, the thinking goes, you’re going to have to cut back on spending. However, this is not the case. Raising the debt ceiling allows Congress to pay for things that it has already decided to spend money on. Around one-third of federal spending is discretionary, for which Congress approves annual spending bills with specific instructions about how to spend the money. The other two-thirds is mandatory, meaning money is spent on certain programs established by existing law, such as Medicare, Medicaid and Social Security. So, not raising the debt ceiling is like hiring someone to build your house, then not paying them.

Tom: What happens if the debt ceiling is not raised?

Mellody: There are a number of items here, Tom. If the government is not authorized to borrow to meet its obligations, typically it will start paring back services and prioritizing in order to operate on reserves and the incoming revenues alone. Beyond that, it enters a shutdown phase, suspending all nonessential services and furloughing workers.

Almost everyone agrees that in the worst-case scenario, the government would also delay payments of interest, which would constitute default. Such a move would be disastrous for the U.S economy, and the global financial system. In 2011, Standard & Poor’s stripped the U.S. of its triple-A credit rating for the first time simply because the Treasury came close to being unable to pay certain benefits.

Tom: So not raising it is certainly bad for the economy. What will that mean for Americans?

Mellody: As we saw in 2013, shuttering the government has huge consequences for the American people. To start with, 2 million federal workers will see their paychecks delayed during a government shutdown, and some “nonessential employees” could not get paid at all. This is especially impactful for Black americans, as we hold about 18 percent of federal civilian jobs, while making up around only 13 percent of the u.s. population.

Some 3.6 million veterans could miss disability of pension payments, if a shutdown were to last for a long period. Nutritional programs for women and children could be impacted, along with Head Start programs. And funds for small businesses and national parks could stop flowing. And these are just a few examples of very important programs that the government operates that are affected when the government is not funded to operate. Hopefully we do not see this happen again this year.

Tom: Always good to have you explain things to us! Thanks for joining us Mellody!

Mellody: Great to be here, Tom!

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