Hagle: Debt ceiling not complicated, but important


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The “debt ceiling” is one of the less complicated parts of the country’s fiscal situation, but given its importance, it’s worth a bit of explanation.

Like any individual or business, the United States can borrow money. The debt ceiling is a limit on how much the United States can borrow to pay its debts. How much money an entity can borrow is determined by several factors. These include the entity’s income, assets, and ability to pay back the borrowed money.

Unlike an individual’s credit card, the national debt does not have a predetermined limit. Congress, which sets the debt ceiling, must be responsible for ensuring that we do not borrow so much that it causes problems for our economy. The United States currently owes about $16.5 trillion. We pay interest on that debt but have not had any success in paying down the principal. In fact, each year we add over $1 trillion to the debt. 

Although Congress has set a limit on how high our debt is allowed to go, it also raises that limit on a regular basis. This raises two points.

First, why have a limit at all? Congress has regularly raised the limit, and the U.S. certainly has assets to cover the debt. Even so, from an economic perspective problems begin to occur when the debt gets so large that it is more than our Gross Domestic Product. Economists do not all agree on when such problems will occur, but the question is whether we are willing to make the necessary changes now to avoid severe problems in the future.

Second, one must consider the politics of raising the debt ceiling. Republicans generally do not want to raise taxes. This is particularly so in a down economy because they believe it will slow what little recovery we have experienced. Instead, they would prefer to cut spending to get the deficit (and ultimately the debt) under control.

What if, however, no agreement is reached? Some suggest that the U.S. will “default” if the debt ceiling is not raised, but that is inaccurate. Although the U.S. currently borrows about 43 cents for every dollar it spends, the national treasury takes in enough money to pay the interest on our debt and other obligations that would prevent default.

Associate Professor Timothy Hagle
Follow on Twitter @ProfHagle

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