Bumping Up Against The Debt Ceiling: That Hurts!
Every few years — or even months — since 1917, Congress has voted to raise the national debt ceiling — the maximum amount the federal government is allowed to borrow.
"Basically it's served, for quite some time now, as a speed bump along the road," says Maya MacGuineas, president of the Committee for a Responsible Federal Budget at the New America Foundation. "Which just means government stops, looks at what it's been doing and says, okay, we're going to borrow some more, and they approve ... an increase."
Since 1962, the debt ceiling has been raised 74 times, and Congress has never voted down an increase.
The current debt ceiling is $14.3 trillion — and the country will hit that limit in the next few weeks. But this time around, some within Congress are pushing back.
"We're spending money we do not have, we're borrowing from our children and our grandchildren, some of whom are not yet born," says Sen. Mike Lee (R-Utah). "That doesn't feel right to me, especially when we're being asked to increase the debt ceiling without putting in place any kind of mechanism to make sure we eventually stop doing this."
Lee says he would vote for another increase in the debt ceiling only if the move is accompanied by a balanced-budget amendment phased in over five years, which would eventually prohibit the federal government from spending more than it takes in during any given year.
"I completely share the concern that if we continue to borrow, this is a terrible situation for the country and what we're doing right now is the wrong fiscal course to be on," MacGuineas says — but she differs with Lee on the immediate next steps.
If the debt ceiling is not raised, she says, an unprepared federal government could start to default on its loans.
"If we turn into deadbeat U.S.A., that just changes the whole way our system works," she says. "We would not be able to borrow on the same terms again, interest rates would shoot up and that would have an effect on the rest of the economy and it would likely put us back into a recession."
Her prescription: Lift the debt ceiling this time, but attach budgetary targets to get the government on the path to reducing the debt.
"This should be the speed bump that makes us change our ways," she says.
GUY RAZ, host:
From NPR News, this is WEEKENDS on ALL THINGS CONSIDERED. I'm Guy Raz.
Every few years, sometimes months, since 1917, Congress has voted to raise the debt ceiling. This is basically the maximum amount of money it allows the federal government to borrow.
And right now, that number is $14.3 trillion, and the Treasury Department says we're getting very close to hitting that limit. Now, Congress has always voted to increase the ceiling every time the feds get close. But this time, it's different.
When Congress reconvenes on Monday, several Republican lawmakers and even some Democrats say they won't let it happen. But why? Debt limits and consequences, that's our cover story today.
(Soundbite of music)
RAZ: So how did we get here? Well, it starts during the Revolutionary War.
Unidentified Man: (Unintelligible).
Professor SIMON JOHNSON (Economist, Massachusetts Institute of Technology): America is born as a country highly indebted.
RAZ: That's Simon Johnson. He's an economist at MIT. The Revolution, he explains, was financed by debt.
Prof. JOHNSON: Partly by borrowing from the French and partly by borrowing from the Dutch in order to buy weapons from them. Now, those debts were very mixed up. They were state level, they were currency that had just been issued. It was Alexander Hamilton who had the some people would say brilliant, some people would say problematic idea of consolidating this all and creating a national debt.
RAZ: And how much?
Prof. JOHNSON: In 1792, I'm looking at $80 million.
RAZ: Eighty million dollars.
Prof. JOHNSON: Eighty million dollars was a lot of money back then. Look, the prevailing philosophy of the day was that government debt was something you should incur only in an emergency like a big war. Of course, there was the War of Independence. Then there was the War of 1812.
But after those wars, there was a determined effort by everybody, really, in political life to pay the debt down. And Andrew Jackson came in partly determined to really see the debt off the scene once and for all.
RAZ: Andrew Jackson, the president who inherited a debt of $58 million and took it down to just $33,000.
Prof. JOHNSON: Well, that was Jackson, and Jackson was determined to get rid of the debt.
RAZ: If the debt was 33,000 today, I would volunteer my entire net worth to singlehandedly pay it off. I would do that as a patriot.
Prof. JOHNSON: And I'm sure that you would be elected to high office on that basis. But in getting rid of the debt or certainly as part of what happened to the economy at that time, the economy slowed down. There was a big depression. And that undermined revenues. So the debt starts to go back up again.
(Soundbite of music)
RAZ: From then on, the debt becomes this big, rolling wave: up, down, but mostly up. And by the middle of the Civil War, it tops a billion dollars for the first time.
Prof. JOHNSON: The success of the North was based in part on its ability to borrow.
RAZ: Now, fast forward to 1917. In two years...
Prof. JOHNSON: All of a sudden...
RAZ: ...the debt jumps almost $20 billion.
Prof. JOHNSON: ...the U.S. goes into the war. It sends a big army to Europe. This is extremely expensive.
RAZ: And by the end of World War II, it's almost $260 billion.
Prof. JOHNSON: That's a staggering number, and that's a tough number to get out of. But after Vietnam and with the disruptions of the 1970s, we turned some sort of corner. This appropriation process goes way off-track.
RAZ: So under President Reagan, the debt tops a trillion dollars. But the numbers really take off under President George W. Bush.
Prof. JOHNSON: It was partly tax cuts, with the belief that if you cut taxes, you get an economic boom.
RAZ: Five trillion when he takes office in 2000.
Prof. JOHNSON: It was partly war.
RAZ: Ten trillion by the end of George W. Bush's presidency.
Prof. JOHNSON: Those are expensive.
RAZ: And under President Obama...
Prof. JOHNSON: And, of course, it was the recession.
RAZ: Four trillion more in just two years.
Prof. JOHNSON: Most of the swing in the debt is caused by the slowdown, caused by the loss of tax revenue.
RAZ: Which brings us to today, a $14 trillion debt. Now, depending on how you calculate it, anywhere between 75 and 90 percent of America's total economic output.
Prof. JOHNSON: Well, it's not particularly sustainable. The bet, if you like, is that we can pay it off over time. If you believe the U.S. remains a dynamic economy, we're going to find our way to new products and new ideas, and figure out how to turn those into money and pay some revenue to the government on the back of that. Then we will be okay.
If you think, however, that we're going to hit stagnation, or if you think the foreigners are going to want their money back quickly, then we're going to have a much bigger problem.
RAZ: Economist Simon Johnson. So if the government is simply allowed to borrow more and more each year, what's the point of asking Congress to set a limit on it at all?
We asked Maya MacGuineas. She's the president of the Committee for a Responsible Federal Budget at the New America Foundation.
Ms. MAYA MacGUINEAS (President, Committee for a Responsible Federal Budget, New America Foundation): Basically, it's served, for quite some time now, as a speed bump along the road, which just means government stops, looks at what it's doing and says, okay, we're going to borrow some more.
Ms. MacGUINEAS: And they approve a limit, an increase.
RAZ: And so over the years and over the decades, it's become kind of this simple procedure. Congress continues to approve increasing the debt ceiling. I read since 1962, they've done this 74 times. In the last 10 years alone, they've raised the debt ceiling 10 times. So traditionally, it has not been a big deal, right? Congress just says, all right, we're getting close to the debt ceiling. Let's raise what the government's allowed to borrow.
Ms. MacGUINEAS: That's right. It's not something that we usually do a whole lot of brinkmanship over, and it doesn't go to the last minute. But it is an excuse, where politicians will go to the floor, give heartfelt speeches about the need not to borrow so much and burn the future generation, all things which I think are reasonably good points, then go ahead, lift the debt ceiling and borrow some more.
RAZ: (Unintelligible). In the past, we have had depressions. We've had a Civil War. We had World War II. How is it that we are in a worse position with respect to the debt now than at almost any other time in our history?
Ms. MacGUINEAS: Well, we've gone through periods where the debt has gone up, and we've also gone through periods where the debt has gone down in the past.
Ms. MacGUINEAS: So we would go into a war, and you would borrow a lot, or a national emergency or an economic downturn. Borrowing would go up significantly.
But then when you came out of it, we would start to close that gap. We would pay some of that debt down. Unfortunately, we've lost that side of the equation in recent years.
Ms. MacGUINEAS: I think there's just a lack of fiscal discipline where we now have a desire, a very strong desire, driven by politics in many ways for more spending, less taxes, not making kind of the hard choices of if you want to spend something, how are we going to pay for it.
And because of the culture of deficits has become permissible, it's become something that politicians of both parties use regularly to help fill in the gaps in their budget. The debt just keeps piling up.
And I think people are worried about stepping forward with the real ways to change or put forth the policies that would take us off this track because they think they'll get beaten up for making hard political choices. So we continue to deficit finance.
RAZ: As you know, Congress has always approved raising the debt ceiling. We are very close, according to the Treasury Department, to hitting the debt ceiling now. I think it's about $14.3 trillion. That is the amount of money Congress has allowed the government to spend.
Many members of Congress, most of them Republicans, are threatening not to allow this to happen. I want to talk to you more about some of the potential consequences of that debt ceiling not being raised in a moment.
But first, I want you to hear a conversation I just had with Senator Mike Lee, a Republican from Utah. He is one of the most vocal opponents of allowing the debt ceiling to be raised. Here it is.
Senator MIKE LEE (Republican, Utah): We're spending money that we do not have. We're borrowing from our children and our grandchildren, some of whom are not yet born. And that doesn't feel right to me, especially when we're being asked to increase the debt ceiling without putting in place any kind of mechanism to make sure that we eventually stop doing this.
RAZ: Now, if the debt ceiling is not raised, as you know, the Treasury Department is warning that it will cripple our economy, that the U.S. will essentially do what it has never done: It will default on its loans.
Sen. LEE: I would think, and I would hope, and I'm trying to legislate in such a way so that the secretary of the Treasury would make sure that the very first payments made with the very first money in the door each month would go to pay the interest on our existing national debt.
I know of no reason why he wouldn't do that, and I find it strange that that threat is made.
RAZ: But why would countries be willing to buy U.S. Treasury bonds if there was a threat that even if it would only be temporary, there'd be a threat that they would become worthless?
Sen. LEE: Well, that's precisely the question I ask, which is if we continue to issue debt at the rate that we're now issuing it, at some point in the very near future, those who buy our debt are understandably going to grow a little bit antsy about the pace at which we're accumulating new debt.
And they're going to start wondering whether or not it's worth the investment, whether or not this is a safe investment. And so it is not the case that there is danger on one side but not the other. Any direction in which we step here is fraught with danger.
And so what I'm saying is before we take that next step and just blindly increase the debt limit, we ought to look seriously at reforming the way in which we spend money and putting in place a balanced budget amendment so as to require Congress to change how it spends so that it's not this reflexive impulse to just raise the debt ceiling again and again and again until we get to the point where we can't get anyone to buy our debt.
RAZ: And with me once again here in the studio is Maya MacGuineas, the president of the Committee for a Responsible Federal Budget at the New America Foundation.
And, Maya, he's saying at some point, you've got to turn off the taps. You cannot continue to give the government the opportunity to borrow and borrow and borrow. Most people in this country don't operate their own households like that. The government can't be allowed to do that.
What could the consequences be of not allowing the debt ceiling to rise?
Ms. MacGUINEAS: Well, listen, I completely share the concern that if we continue to borrow, this is a terrible situation for the country. And what we're doing right now is the wrong fiscal course to be on.
But I don't at all share his confidence that if we didn't lift the debt ceiling, we wouldn't have a default. So there are a lot of complicated factors in how you pay money if you haven't increased the debt ceiling, and these are the kind of complications you don't want to throw into already jittery debt market.
RAZ: Well, break it down. I mean, when you say default, what does that mean? Does that mean that all of a sudden, China can't collect on its debt and other countries? And what does that actually mean for our economy?
Ms. MacGUINEAS: Right. So we've issued all these treasuries, bills, bond and notes, and we owe interest on them. And so if you don't pay your interest, that would be a default.
And so one of the issues is, could we prioritize that interest? Could we pay the money that we owe on the bonds but not pay our money to our troops or Social Security recipients? And then you have a whole political discussion of how is that going to fly if you're sending the money to China, but you're not sending it to your own retirees.
There is a question of whether you could prioritize it, but it's complicated because the timing of when money comes into the government and when it goes out is not completely under our control. And so we still might end up defaulting.
And if we turn into deadbeat USA, that just changes the whole way our system works. We would not be able to borrow on the same terms again, interest rates would shoot up, and that would have an effect on the rest of the economy, and it would likely put us back into a recession. I think that's not unlikely at all.
At the same time, we shouldn't just lift the debt ceiling and say, oh, we'll figure all this out tomorrow. We should attach to that some reasonable changes, some savings, some budgetary mechanisms to get us on the right path, and this should be the speed bump that makes us change our ways.
RAZ: That's Maya MacGuineas. She's the president of the Committee for a Responsible Federal Budget at the New America Foundation.
Maya, thanks so much for coming in.
Ms. MacGUINEAS: Hey, thank you very much. Transcript provided by NPR, Copyright NPR.