NOTE: As of June 20, 2019, the debt ceiling has risen to $22 trillion.
If the President and Congress cannot reach agreement by August 2nd to raise the debt ceiling and pay our national obligations, the federal government could default on its financial obligations for the first time in history. Here are some of the frequent questions we get at Taxpayers for Common Sense (TCS) and the answers:
Q. What are the debt and the debt ceiling?
A. The Constitution gives Congress the sole authority to borrow money. The debt is most simply understood as nearly all of the money America has borrowed and now owes to individuals, corporations and nations, including the central banks of China, Japan and other countries plus debt owed to federal government trust funds for Social Security and Medicare. We borrow this money to pay for all sorts of government activities, from military operations to the “stimulus” and even to pay interest on debt.
The debt ceiling is the total amount of debt the government can accumulate. Once the total amount of debt reaches the debt limit, the government cannot pay its bills by borrowing money, it can only spend the revenue it receives. The debt ceiling was first established in 1917 at $11.5 billion. Congress sets the debt ceiling and has raised it 74 times since 1962, ten of those times since 2001. Today, the debt ceiling is $14.3 trillion, we reached the ceiling May 16, 2011 and the Treasury Department has been engaging in extraordinary measures to avoid default. Those alternatives will be exhausted August 2 and the debt ceiling will be reached.
Q. What does default mean?
A. Default will happen when the Treasury Department is obligated to pay out more money than it collects in taxes and other revenues, and it cannot borrow money to make up the difference because it has reached the debt limit. Individuals, corporations, foreign banks and other entities that expect to be paid by the government may not be paid. This might include Social Security payments, payment for all sorts of services and products the government has purchased, and paychecks to military and nonmilitary employees. The nation’s credit card is maxed out and the incoming revenues are not enough to meet our country’s financial obligations. Much of the federal government’s operations would come to a screeching halt.
Q. What does default mean for jobs, the economy and markets?
A. It means more hard times to come. U.S. Treasuries are bonds the government sells to borrow money. They are simply a promise that America will pay the bond buyer the value of the bond plus interest. The Managing Director of the Economic and Market Analysis team at the financial giant Citigroup recently wrote that the “financial implications of an actual Treasury default, even briefly, could lead to the largest financial shock in history.” Citigroup put it this way: “Asking what the U.S. economy might look like after a possible U.S. Treasury default is akin to asking ‘what will you do after you commit suicide?’” In short, default will mean that hardworking Americans will see a loss in savings, more layoffs as the capital markets falter and more trouble in the housing market.
Q. What are businesses saying?
A. Businesses need steady and predictable markets to expand and hire more employees. Default will upset the capital markets, making it harder for businesses to start, expand and hire. It’s not hard to understand that a homebuilder will plan to build fewer homes, hire fewer contractors and buy fewer building materials if the financial markets that support home loans are upset. A juggernaut of businesses—the U.S. Chamber of Commerce, the Business Roundtable, the Financial Services Forum, and the National Association of Manufacturers—issued a statement saying, “Now is the time for our political leaders to put aside partisan differences and act in the nation’s best interests.” The president of the Financial Services Forum said, “Failure to raise the debt ceiling and the ensuing default and inability of our country to pay its bills as they come due would have harsh implications for the dollar, the international and domestic financial system, economic growth, and job creation.”
Q. What are the total debt and the average American’s share?
A. As of July 19, 2011 the total debt is $14.3 trillion. That works out to $47,194 per person in America. You can check out the debt to the penny here.
Q. Can America cut its debt?
A. Yes. In fact, only 10 years ago in 2001, the federal government was running an annual surplus. Incredible as it may seem, at the time Congress was actually debating whether or not it should pay down the debt. The nation’s financial outlook was so bright, that people like Alan Greenspan, then the Chair of the Federal Reserve, warned that paying down the debt too fast would be a mistake. It will take time, but we know it can be done because it started to happen only ten short years ago.
Q. Would default send a signal America is finally serious about the debt?
A. No. It would send the signal that America borrows money and does not pay it back. We’d be a deadbeat nation. Voting against raising the debt ceiling is a shrill political statement with unacceptable consequences. Default will sully America’s reputation, increase unemployment, make American families poorer, do more damage to the housing market and, in fact, increase the national debt by raising interest payments. No political statement is worth the financial pain default will cause American families.
Q. What should the President and Congress do right now?
A. TCS focuses on wasteful spending and tax reform that both Democrats and Republicans have endorsed. There is more agreement than people realize. The bi-partisan “Gang of 6” Senators called for $3.7 trillion in savings from spending and entitlement cuts as well as tax reform. Speaker Boehner has talked about making sure oil and gas companies pay their fair share. President Obama wants to close tax loopholes that send billions of tax dollars each year to massive, profitable oil companies. More than 70 Senators, Democrats and Republicans, recently voted to cut ethanol subsidies. The House Republicans have called for $6 trillion in cuts and the President has called for $4 trillion in cuts. Both want to make substantial cuts to federal spending, the problem is politics.