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The dysfunctional debt ceiling and why we should kill it: 5 questions answered

1. What is the debt ceiling?

Like the rest of us, governments must borrow when they spend more money than they receive. they  do so by issuing bonds or IoUs  that promise to  repay the  money and make regular interest payments. Government debt is the total sum of all this borrowed money.

the debt ceiling, which congress established a  century ago,  is  the maximum amount the government

can borrow. It’s a limit on the nation- al debt.

2. What’s the national debt?

currently,  U.S. government  debt is

$22  trillion, a little more than the value of all goods and services that will be produced in the U.S. economy this year.

Around one-third of this money the government actually  owes itself. the  Social Security Administration has  accumulated a   surplus and invests the extra  money, currently

$5.8  trillion in government  bonds. the   Federal reserve   holds about

$2.1 trillion in U.S. treasuries.

the rest is public debt. As of last May, foreign countries, companies and individuals  owned $6.5  trillion of U.S. government debt. Japan and china  are the largest holders with about $1.1  trillion each. the  rest is owed to U.S. citizens and businesses, as well as state and local govern- ments.

3. Why is there a borrowing limit?

before 1917, congress would autho- rize the  government   to  borrow a fixed sum of money for a specified term. When loans were repaid, the government could not borrow again unless authorized to do so.

the Second Liberty bond Act of

1917, which created the debt ceiling, changed this. It allowed a continual rollover of debt without congressio- nal approval.

congress enacted this measure to

let then-President Woodrow Wilson spend the money he deemed neces- sary to fight World War  I  without waiting  for often-absent  lawmakers to act. congress, however,  did not want to write the president a blank check, so  it  limited borrowing to

$11.5  billion and required legisla- tion for any increase.

the  debt ceiling has been increased dozens of times since then. the last change occurred in February

2018  when congress suspended the limit until March 1, 2019. the  new

ceiling became the debt outstanding on that day, in the amount of $22.03 trillion.

4. What happens when the US

hits the ceiling?

the   U.S.   government generally spends more than it takes in – $900 billion more in  fiscal  year  2019. Since March 1, borrowing to make up the difference is not possible. the government can spend only its cash on hand and its tax revenues.

treasury Secretary Steven Mnuchin is  now using “extraordi- nary  measures”  to  conserve cash. one  such  measure is  temporarily not funding retirement programs for government employees. the expecta- tion is that once the ceiling is raised, the government  would make up the difference.

As of July 15, the treasury  had

$223  billion in cash – down from

$264   billion at  the  start  of  the month. It is unclear how long this money will last. expenditures  and revenues  fluctuate  considerably;

$200 billion can disappear in a mat- ter of weeks.

the bipartisan Policy center fears that the U.S. could run out of cash in  early September, although the country’s  coffers may be empty even earlier. With  congress  sched-

uled to take its annual August recess beginning July 26, something needs to be done soon. If the cash is gone, decisions will have to be made about who gets paid with daily tax receipts. Government

employees  or  contractors may not get paid in full. Loans to small busi- nesses or college students may stop.

When the government can’t pay

all its bills, it is technically in default. Some pundits have claimed that a government default would have dire economic consequences –  soaring interest rates, markets in panic and maybe an economic depression.

Such fears seem overblown because once  markets start  pan- icking, congress  and the president usually act.this is exactly what hap- pened in  2013   when republicans sought to  use the  debt ceiling to defund obamacare.

but we no longer live in normal political times. the  major political parties are more polarized than ever

earlier this year we endured the lon- gest government shutdown in history over federal government spending priorities. President Donald trump  wants the debt ceiling raised so that he

can push his spending priorities  for the next fiscal year, which include the military, border security and the border wall. Democrats also want to increase spending but in areas where republicans want to see cuts: hous- ing, education and the environment.

5. Is there a better way?

the  U.S.  is  one of  few countries with a  debt ceiling. other  govern- ments operate effectively without it. America could too.

Having a  debt  ceiling is  dys- functional. It  makes it  harder for the treasury  to pay bills when they come due.

the best solution would be to just scrap the ceiling altogether. congress already approved the spending and the tax laws that require more debt; it  shouldn’t have to  approve the additional borrowing as well.

It  should be  remembered  that the  original debt  ceiling was put in place because congress  couldn’t meet quickly and approve needed spending to  fight a  war. In  1917 cross-country travel  was  by  rail, requiring days to get to Washington. this  made some sense then. today, not so much.