WASHINGTON (AP) – The idea that the US government is violating its “Debt limit” it’s scary. But what, exactly, are Washington lawmakers fighting against?
The debt limit is a nearly century-old artificial cap that Congress has placed on the US government’s borrowing capacity. Lawmakers have raised or suspended it nearly 80 times since 1960, but this time there is a deepening partisan standoff, underscoring how the debt limit has become a political weapon.
House Democrats voted on Tuesday to suspend the debt limit until the end of 2022. The proposal is expected to meet fierce resistance in the equally divided Senate, where Republican lawmakers say President Joe Biden and Democrats in power would have to go it alone as they also try to move on to a multibillion-dollar package of tax increases on the rich and new spending on children, health care, infrastructure and the environment.
The Biden administration insists on bipartisanship on the issue.
“It is not a partisan issue to want to protect the full faith and credit of the United States,” White House press secretary Jen Psaki said Wednesday aboard Air Force One.
The issue is urgent because the extraordinary measures used by the Treasury Department to keep the government running would be exhausted by October. If Congress does not act, it creates the possibility of a default that could collapse financial markets and plunge the economy into recession. The bill passed by the House also ties the suspension to a measure that would continue to fund the federal government until December 3.
Republicans, despite their refusal to help, agree with Democrats that a default must be avoided.
“America must never fail – we never have and we never will” Republican Senate Leader Mitch McConnell said Wednesday he was next expressing his opposition to a bipartisan increase.
Here is an explanation of the problem:
WHY IS THERE A DEBT LIMIT?
Before World War I, Congress had to approve every bond issue. The debt limit was created as a workaround to finance the war effort without the need for a constant string of votes.
Since then, a tool created to facilitate the functioning of government has become a source of dysfunction, stoking partisan warfare and creating economic risk as debt has grown in size over the past 20 years.
The Congressional Budget Office estimates that annual budget deficits of $ 1 trillion or more will be common for the next decade, so the problem will be recurring. Debt has grown largely to fund recoveries from the Great Recession and the coronavirus pandemic. The imbalance over the coming years increasingly reflects government spending on programs such as Medicare and Social Security that exceed tax revenues.
WHAT IS THE DEBT LIMIT?
The cap is now $ 28.4 trillion. Under the Trump administration, the debt ceiling has been suspended three times. The latest suspension – adopted on a bipartisan basis in 2019, when debt stood at $ 22 trillion – ended in July.
The Treasury Department has since embarked on what it calls extraordinary measures to keep the government functioning.
The debt of $ 28.4 trillion is greater than the annual gross domestic product of the United States. The Biden administration and Congressional Democrats have said the next debt ceiling suspension should be bipartisan, as it will apply to past spending approved by the government. It’s like paying a credit card bill and signaling the financial markets that the United States will be fiscally responsible.
Moody’s Analytics estimates indicate that a potential recession from government cuts if the cap remains in place could lead to 6 million job losses and stock market declines that could wipe out $ 15 trillion in household wealth.
WHY ARE THE REPUBLICS OPPOSING AN INCREASE?
Simply put, they don’t have the power and they don’t like Biden’s political agenda.
While the administration notes that the debt ceiling reflects past spending choices, McConnell and Republicans link any increase to Biden’s multibillion-dollar plans to raise taxes on the rich and corporate to fund programs. and tax breaks that could help the middle class. McConnell said the tax hikes would end up hurting the middle class and lead to a “socialist” transformation of the country.
“Democrats control the Senate, the House and the White House”, McConnell said Wednesday. “If they are to embark on another tax and reckless spending frenzy that harms working families and helps China without any Republican contributions, they will have to raise the debt ceiling themselves.”
Democrats helped Republicans lift the debt ceiling when Republicans controlled Congress. After Democrats took over the House in 2019, President Nancy Pelosi negotiated a broader spending package with the Trump administration that included an increase in the debt ceiling.
WHO IS TO BLAME FROM THE GROWTH IN DEBT?
The debt limit has been suspended three times under Trump, who used debt to fund his tax cuts in 2017, then had to borrow even more when the economy fell last year with COVID-19. Biden and Obama took office amid weakened economies and passed ambitious aid plans that forced the government to borrow more.
Investors allowed Congress to run higher deficits because low interest rates made it easier to finance the government with debt. Interest rates on 10-year US Treasuries are now lower than in fiscal 2001, when the government last recorded an annual surplus.
Pew Research Center polls suggest voters became less concerned about debt as the pandemic raged. Last year, only 47% said the deficit was a “very big problem” compared to 55% in 2018.
WHY NOT JUST GET RID OF THE LIMIT?
A simple solution would be to repeal the debt limit altogether so that it can no longer be used as leverage in congressional fights.
This step would allow spending and taxes approved by Congress and the President to determine the amount of debt issued by the government, instead of a legally binding but otherwise redundant cap. A Biden administration official, insisting on anonymity to discuss the private conversations, said the White House would only weigh in on the elimination if Congress showed there was support for the idea.
There is some bipartisan support among those who have faced this challenge before. Jason Furman, a Harvard University professor, former chief economist at the Obama White House, and Rohit Kumar, a former McConnell aide, pleaded for the removal of the cap in a 2017 Wall Street Journal op-ed.