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Watch Yellen warn Congress: This could have 'catastrophic economic consequences'
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Republicans and Democrats in Washington are gearing up for their occasional fight over raising the US debt limit.

Also known as the “debt ceiling,” it’s exactly what it sounds like – the maximum that the federal government is allowed to borrow. Why is there a maximum? Because Congress set one more than a century ago to curtail government borrowing – but instead of sticking to it has gone ahead and raised the limit every time it’s been hit.

The arguments in favor are generally the same every time. One is that the money’s already been spent – raising the debt limit just lets us keep paying back our creditors. (More on that in a second.) Another is that failing to raise the limit would cause the US to default on some of its obligations, triggering a crisis in the financial system.

The reasons against it are simpler. Outstanding public debt is about $28.7 trillion. That’s a hard number to choke down and it’s getting larger every second.

People really concerned about public debt will add in the currently unfunded liabilities of Medicare and Social Security and argue total US liabilities are somewhere north of $156 trillion. But that’s a different, and really complicated, story.

Right now, Republicans in Washington are saying they won’t vote to raise the debt limit while Democrats are pushing for a vast $3.5 trillion, 10-year spending plan.

Here’s what you need to know about the debate that’s going to unfold over the next week.

What happens if the debt ceiling isn’t raised?

Treasury Secretary Janet Yellen has been warning Congress for months about the consequences of not raising the limit. The US technically reached its limit in August, when a two-year reprieve Congress passed in 2019 expired. The Treasury Department has been moving things around to cover costs since then.

This is from a CNN business report:

“A failure to raise the debt limit would have serious negative consequences,” Goldman Sachs economists wrote in a report to clients Monday titled “The debt limit looks riskier than usual.”

The Wall Street bank added that if Congress does not raise the debt limit in time, the Treasury Department would need to halt more than 40% of expected payments – including some to households.

Who owns US debt?

You do, probably. The Social Security Trust Fund buys a lot, along with pension funds and institutional investors. Creditors also include foreign nations, like China and Japan, although they do not own anywhere near a majority of the US debt.

Why is there a standoff over the debt ceiling?

There are 50 Democrats in the Senate, but unless they end the filibuster, it will take the agreement of 10 Republicans to get a vote on the debt ceiling.

That means that for now there’s a standoff.

There’s no guess work about what Republicans are doing. Senate Minority Leader Mitch McConnell said in a tweet Wednesday that his party feels no need to vote to pay the nation’s bills.

“Let’s be clear: With a Democratic President, a Democratic House, and a Democratic Senate, Democrats have every tool they need to raise the debt limit. It is their sole responsibility. Republicans will not facilitate another reckless, partisan taxing and spending spree.”

It’s a particularly rich position for McConnell since Republicans unilaterally passed the tax cuts in 2017 that turbocharged the deficit spending highway the US has been driving on for decades. They also approved the first round of pandemic relief passed under former President Donald Trump.

Who is to blame?

There’s plenty of hypocrisy to go around. Republicans complain that Democrats’ spending proposals add too much to the debt. Democrats complain that Republican tax cuts add too much to the debt.

Meanwhile, they’re both adding to the debt whenever they’re in power. Democrats just happen to be in power right now.

How has this worked in the past?

In the past 50 years, according to the Treasury Department, Congress has acted 78 times to raise the debt limit.

That includes 49 times under Republican presidents and 29 times under Democratic presidents.

The last time lawmakers voted to rise the debt limit, it was a bipartisan affair. They raised the limit for a time period – two years – instead of a dollar amount, as in many previous votes.

Even then, with a Republican president and Republicans in control of the Senate, it was mostly Republicans among the 27 who voted “no.” The measure also set out a budget.

What happens next?

Democrats will try to shame Republicans, arguing raising the limit has more to do with paying bills for money already spent rather than new spending.

It’s a valid point, but Democrats’ current effort to pass both a $1.5 trillion bipartisan infrastructure and a $3.5 trillion Democrats-only infrastructure bill to remake the economy and address climate change complicates their message.

So they’ll try to shame and cajole Republicans. They could also sugarcoat the debt limit vote by burying the measure in a must-pass spending bill. Keep the government running AND keep the government solvent.

The smart money is still on lawmakers figuring out a way to raise the limit and pay the bills for the money they’ve (we’ve) already spent.

CNN’s Chris Cillizza calls it the little secret about raising the debt ceiling: “Congress has never not done it. Why? Because the consequences of not doing it are far too dire for the country: The Treasury Department would default on its debts, badly damaging the country’s economic credibility around the world.”

When Republicans did seriously threaten to get in the way of the debt limit increase, in 2011, Cillizza points out that it led Standard & Poor’s to downgrade its ratings on US debt for the first time in 7 decades.

He writes, smartly:

This then is a decidedly dumb debate. Members of Congress are engaging in its usual brinksmanship over

  • a) whether to pay bills they’ve already rung up and
  • b) knowing they will, eventually, find a way to raise the debt ceiling.

Because they always do.

If it’s a dumb debate, why not just get rid of this charade?

The billionaire David Rubenstein, who founded the Carlyle Group, is not alone in thinking the US should give the Treasury Department the ability to pay the bills.

“We should take a serious look at eliminating the debt limit. No other country in the world – none, zero – has a debt limit,” Rubenstein, told CNN’s Matt Egan on Monday. “Why do we need a debt limit? We don’t need a debt limit.”

It’s written into law, however, and Congress has acted in various ways to allow for debt since the country’s founding. The 14th Amendment refers to the validity of public debt in law. If lawmakers can’t agree to do something like raise the debt limit, what are the odds they’ll be able to do something like end the debt limit?

Should you be worried about the debt?

There are plenty of organizations and think thanks that would tell you it’s a huge problem.

There’s a growing school of thought among progressives that the debt is not as concerning as fiscal hawks and Republicans would have you think. Check out the Peter G. Peterson Foundation for the point of view that all this debt will fall on future generations.

The economist Stephanie Kelton, who pushes the idea of Modern Monetary Theory, argues that since the US prints its own currency, that private wealth balances out public debt.

The government balance sheet, she said in a recent Ted Talk, isn’t like you’re personal balance sheet. The US government, unlike you, can print money.

“As the issuer of the currency, it doesn’t have to worry about running out of money. It can afford to buy whatever is available and for sale in its own currency. That might involve spending on roads and bridges, a military arsenal, or hospitals and schools. Finding the votes to pass a spending bill can be hard, but finding the money is never a problem. They just create it,” she said.