debt ceiling...16484_7.11_000004905228XSmall

Raising (or Ignoring) the Debt Ceiling

Jul 11, 2011 • Economic Debates, Economic History, Financial Markets, Government, Macroeconomic Measurement, Money and Monetary Policy • 98 Views    No Comments

Washington Post cartoonist Tom Toles summarizes all we need to know about the politics of debt ceiling negotiations in these 33 political drawings. The first one starts with a Democrat/Republican card game in which each raises the ante. Others refer to the debt ceiling as a time bomb (#2), voters saying “Don’t touch my sacred cow,” and finally, in #33, we see a government shutdown in a coffin saying, “It would be just for a little while to make a point.”

Covering the topic further, in this NY Times Op-Ed, Harvard Law Professor Lawrence Tribe concludes that the Constitution will not save us. While some say Section 4 of the 14th Amendment, the public debt clause, can be used to nullify the ceiling and thereby let President Obama ignore it, Tribe disagrees.

Finally, some reality. If, by the beginning of August, the U.S. cannot borrow additional money by selling new U.S. Treasury securities, then we will not have enough money to cover all of our fiscal obligations. Just like a family with inadequate income, we will have to decide what to pay and what not to pay. The Economist summarizes it this way: “Delayed payments may hurt pensioners and cause political damage, but a default on Treasury debt would unleash global financial chaos. Either outcome would be deeply unpleasant…”

More specifically? Interest payments on outstanding debt, Social Security payments, military salaries, the President’s salary, each could be cut. Or, the U.S. might postpone interest payments on government bonds that businesses, individuals, countries, and the U.S. government own.

The Economic Lesson

The need to authorize the maximum amount we can borrow was established by Congress in 1917 through the Second Liberty Bond Act. Its goal was to maintain Congress’s “macro” control over total U.S. borrowing even though it had decided it would no longer directly oversee the “micro” details for specific borrowing decisions. Since 1962, the U.S. has raised its debt ceiling 75 times.

An Economic Question: How might debt ceiling negotiations be about more than money?

Related Posts

« »