The cliché “better late than never” may have never so aptly applied to a situation as it has with the debt ceiling fight. After months of being obsessed with Casey Anthony, an NFL lockout, and a Harry Potter Americans are finally beginning to wake up to the fact that there is a serious fight going on in Washington that could dramatically affect their lives in the coming weeks, months, years, and decades. After President Obama’s primetime speech last night Americans are engaging in something of a crash course in debtology. Americans have been involuntarily awakened from the summer slumber, and they are not happy about it. Below one can find all the resources needed to quickly catch up on the debt ceiling debate.
What is the debt ceiling?
Under Article 1, Section 8 of the United States Constitution the Congress has the power “To borrow money on credit of the United States.” Throughout history the Congress has routinely raised the debt, though it has turned into more of a contentious matter when the Congress and the White House are controlled by different parties. In this case President Obama and the Republicans, who control the House of Representatives, find themselves at odds over what needs to be done to increase the debt ceiling.
Does the debt ceiling need to be raised?
Some conservatives say no, and every Democrat says yes. Technically the debt ceiling has already been reached, but the Treasury Department was able to use a number of accounting tricks, what they call “extraordinary measures,” to avoid a default until August 2. On August 2 the tricks run out, and the Treasury simply will not have enough money to pay all their bills.
Some Republicans argue that the Treasury could simply chose to pay the interest on the debt to avoid default. While technically true, if the Treasury pays off the interest it will not have enough money to pay all other debt obligations like Social Security and payments to military service members. In many ways, the Treasury Department would be put in the same situation as many families who do not have enough income to meet their monthly bills. Without the ability to take out a loan to pay those bills the Treasury will default on some obligations, likely resulting in a lower credit rating for the country.
Why should I even care?
If the debt ceiling is not raised it could lead to significant consequences for the American economy. When Greece nearly defaulted on their debt the world financial markets reacted negatively, and Greece owes a fraction of what the United States owes.
The debt is not just numbers; it is real money that has been lent with real expectations of returned payment. The debt is owed to multi-national banks, foreign countries, and the public itself through treasuries. If an individual defaults on a loan, the debt does not disappear. Instead, the bank takes the loss. If the United States goes into default, much of the world will suddenly face the prospect of losing about $14 trillion dollars. The results likely will be catastrophic.
At the very least a default would lead to higher interest rates which would make it more expensive for consumers to take out a loan on a house or car. Interest rates on credit cards and student loans could also be adjusted upwards. If spending contracts and the markets truly collapse it could send the United States into another recession or even economic depression.
There are also consequences to any potential deal. The current proposals include adjustments to programs that affect nearly every American. The deal could reduce benefits for future Medicare beneficiaries, or change Medicare in its current form all together. Some have proposed raising the retirement age for Social Security, which could force millions of Americans to work longer.
One way or another, the debt ceiling story is likely to impact the lives of many Americans more than they know.
What do Democrats want to do about the debt ceiling?
Originally the White House argued that budget negotiations should be separate from the debate, and that the debt ceiling should be raised no matter what in order to avoid default.
However, Republicans insisted on spending cuts before they agreed to raise the debt ceiling. Democrats relented and have negotiated with Republicans on an agreement which would cut about $3 trillion in spending and use “revenue raisers” to cut the deficit by another $1 trillion. The Republicans rejected this offer, saying the “revenue raisers” are really tax hikes. The Democrats argued that a “balanced approach” would include higher taxes on the rich and corporations in addition to cuts to programs that help the middle class and poor.
Now the Democrats have even given up on the revenue raisers, and submitted a plan that would cut $2.7 trillion from the deficit over 10 years. The plan would also raise the debt ceiling through 2013, making it unnecessary to go through this fight again before the 2012 elections.
What do Republicans want to do about the debt ceiling?
Republicans have become very fond of saying that Washington does not have a revenue problem, but instead has a “spending problem.” Republicans have flatly rejected any proposal which would increase taxes no matter how much those tax increases are outweighed by spending cuts.
Republicans have demanded that any increase in the debt ceiling be matched with offsetting spending cuts in the future. Some Republicans have argued that these cuts should look not only at discretionary spending, but also entitlement spending like Social Security and Medicare. Earlier this year the Republicans passed a budget proposal from Rep. Paul Ryan (R-WI) that would dramatically alter Medicare by changing into more of a private voucher program.
Republicans argue that any tax increases, even those on the wealthy, would have a negative impact on the economy at the wrong time. Speaker Boehner has also claimed that he simply does not have the votes to pass any measure which includes tax increases.
Last week Republicans passed the “cut, cap, and balance” bill out of the House. That bill then failed to pass in the Senate which is controlled by Democrats. The “cut, cap, and balance” bill does not contain any specific spending cuts, but merely mandates that spending cuts be made in the future in order to balance the budget. Democrats oppose the bill because they say it does not allow for increased revenues, and would likely result in dramatic cuts to Social Security and Medicare in the future.
Realizing “cut, cap, and balance” would fail, the Republicans this week submitted a proposal which would increase the debt ceiling for about six months, and then require another vote to increase the debt ceiling early in 2012. The 2012 vote would be contingent upon adopting more spending cuts, likely to Social Security and Medicare. Democrats oppose this measure, saying it will be impossible to reach a deal in an election year, and saying a short-term debt limit increase could still hurt the United States credit rating.