WASHINGTON, March 15, 2015 − Last Friday, the federal government reached the congressionally approved debt ceiling, meaning that the government is not authorized to borrow any more money. Since the government spends almost $2 billion per day more than it receives in revenue, technically the government must reduce spending immediately unless Congress agrees to raise the debt ceiling.
Both chambers of Congress have Republican majorities, so it is safe to assume that the debt ceiling will not be increased unless there are some assurances from the president that spending will be reduced and the annual deficit brought down. This may be a problem since President Obama submitted a 2016 budget the Congressional Budget Office says will result in adding $6 trillion to the public debt over the next 10 years.
The last time we had a showdown on this issue was in 2013, when the government shut down for 16 days. This followed the sequester, which had taken effect in March. The sequester contained automatic spending cuts that the Republicans insisted be implemented if no agreement could be reached by both parties to reduce spending. No agreement was reached. The sequester was on.
Prior to this, there was an earlier debt ceiling crisis in 2011. At that time, the credit rating of the U.S. government was downgraded, although a last-minute deal avoided an actual shutdown. That year, Republicans had a majority in the House of Representatives, but not in the Senate.
With control of both chambers of Congress and with passage of spending bills in the Senate requiring only a simple majority of 51 (Republicans currently have 54), the Republicans should be in a stronger position to pass a debt ceiling increase while getting some assurances that spending will be reduced.
The president, though, has the power to veto the spending cuts that Congress attaches to the debt ceiling bill. But a veto would mean that the government would have to shut down, and the president certainly does not want that to happen. For that reason, the outcome is uncertain.
Should we be fighting about raising the debt ceiling? Or, since Congress technically has to approve almost all spending, can’t the Republicans reduce spending without using the debt ceiling as a bargaining chip?
Some argue that we do not need a debt ceiling. Indeed, most countries do not have one and the U.S. has raised the debt ceiling 74 times already, usually without incident.
But now, most argue that the debt ceiling is needed more than ever. Without it Congress may bow to short-term political pressure and agree to continue to increase spending at an unsustainable rate.
The public debt is the total of all annual budget deficits, currently about $18 trillion. That is more than 100 percent of GDP and more than 500 percent of the federal government’s total revenue. It is analogous to a person with a $100,000 income carrying a $500,000 mortgage.
Making matters worse, there is no plan to ever pay this money back. Since annual debt payments are for interest only, the entire balance that was borrowed must be repaid when the bonds come due. To repay them, the government simply “rolls them over, selling new bonds to replace those expiring. Unless there is a budget surplus like we had between 1998 and 2001, it is clear that total U.S. indebtedness will never be reduced.
This will eventually become a huge problem, especially considering the nation’s underfunded entitlement programs. Look at Social Security, for example. This is a program under which those who are currently employed pay the benefits for those who have retired.
As long as the population mix remains relatively constant — seven people working for each person collecting -− the system works. But because there is such a large number of baby boomers retiring and because birth rates are low for the generations after the baby boomers, we will eventually have only two or three people employed for each retiree. At that point the math fails.
Add in the fact that people are now living 10 or 20 or 30 years after they retire, and we have a Social Security system that will run out of money soon, likely within the next 10 years. A similar situation is occurring in Medicare, a situation that is being exacerbated by the Affordable Care Act, especially since the percentage of adults either working or actively seeking work is declining and now stands at a 35-year low.
The Treasury Department can move some money around and buy some time before a real crisis happens. But it will be interesting to see just how steadfast those elected to Congress on their pledge to balance the government budget and avoid increases in the debt will remain.
Hold on to your seats. This could be a wild ride.