US Economy Debt Ceiling Crisis
Writer: Pavithra Krishnan
Editor: Dahlia Carmona-Valdivieso
At the beginning of October, the U.S. government was facing a massive dilemma regarding the debt ceiling. On or before October 18, the US Treasury had to pay its debts or raise the debt ceiling. Initially, Senate Republicans rejected an emergency financing proposal that would have funded the government until early December. This has occurred on several occasions in the past. Each time the United States comes close to reaching its debt ceiling, Congress votes to increase or suspend it. However, in 2011, S&P Global Ratings downgraded the country's credit rating due to default potential. In essence, the United States became less creditworthy. Historically, lifting the debt limit has been a nonpartisan issue, and there usually has been widespread approval of raising or suspending the debt ceiling to keep the economy functioning. Still, with the 2011 default, there have been divergent views on how to address it.
If the debt issue remained unsolved, the US might have defaulted again. Republicans used a filibuster, a legislative tool that slows or prohibits debate or votes, to thwart Democratic efforts to increase the US debt ceiling. They did so to avoid implementing Biden's $3.5 trillion Build Back Better Agenda and avoid another U.S. default. Treasury Secretary Janet Yellen warned that inactivity would harm the economy more: Military pay may have been delayed, along interest rates on credit cards, vehicle loans, and mortgages may rise. Again, a default would also have jeopardized the dollar's status as the world's reserve currency. Republicans thought Democrats could and should lift the debt limit alone. Democrats said Republicans were playing a dangerous political game.
The Fed assessed the impact of a one-month fixed debt ceiling from mid-October to mid-November in 2013, during which Treasury continued to pay entire interest. At the time, they predicted a mild two-quarter recession, with unemployment rates increasing by 1.25 and 1.7 percentage points over the following two years. Assuming a 2% rise in the unemployment rate today, this would mean 2.7 million people would lose their job by 2022. "Not only are Republicans refusing to do their job, they're threatening to use their authority to prevent us from doing our job: rescuing the economy from a catastrophic event," Biden said when questioned about the debt limit, "Honestly, I believe it's dangerous and disgusting."
Fortunately, around Mid-October, the Senate was set to vote on raising the country's borrowing limit. Democrats said they would accept Mitch McConnell's offer, a deal that would extend the debt ceiling for two months, with work required before October 18. However, Biden's $3.5 trillion Build Back Better package has been stalled in Congress due to its high costs. The Treasury Department also warned that the cash would deplete around December. Secretary Yellen said the Congress's debt-limit deal "provides only a temporary reprieve." No final decisions have been made yet, but this interim approach will enable politicians to reach an agreement without endangering the economy.
If the debt issue remained unsolved, the US might have defaulted again. Republicans used a filibuster, a legislative tool that slows or prohibits debate or votes, to thwart Democratic efforts to increase the US debt ceiling. They did so to avoid implementing Biden's $3.5 trillion Build Back Better Agenda and avoid another U.S. default. Treasury Secretary Janet Yellen warned that inactivity would harm the economy more: Military pay may have been delayed, along interest rates on credit cards, vehicle loans, and mortgages may rise. Again, a default would also have jeopardized the dollar's status as the world's reserve currency. Republicans thought Democrats could and should lift the debt limit alone. Democrats said Republicans were playing a dangerous political game.
The Fed assessed the impact of a one-month fixed debt ceiling from mid-October to mid-November in 2013, during which Treasury continued to pay entire interest. At the time, they predicted a mild two-quarter recession, with unemployment rates increasing by 1.25 and 1.7 percentage points over the following two years. Assuming a 2% rise in the unemployment rate today, this would mean 2.7 million people would lose their job by 2022. "Not only are Republicans refusing to do their job, they're threatening to use their authority to prevent us from doing our job: rescuing the economy from a catastrophic event," Biden said when questioned about the debt limit, "Honestly, I believe it's dangerous and disgusting."
Fortunately, around Mid-October, the Senate was set to vote on raising the country's borrowing limit. Democrats said they would accept Mitch McConnell's offer, a deal that would extend the debt ceiling for two months, with work required before October 18. However, Biden's $3.5 trillion Build Back Better package has been stalled in Congress due to its high costs. The Treasury Department also warned that the cash would deplete around December. Secretary Yellen said the Congress's debt-limit deal "provides only a temporary reprieve." No final decisions have been made yet, but this interim approach will enable politicians to reach an agreement without endangering the economy.
References:
Smith, David. “Biden Warns ‘Meteor Headed to Crash’ into US Economy amid Debt Struggle.” The Guardian, The Guardian, 4 Oct. 2021, www.theguardian.com/us-news/2021/oct/04/joe-biden-debt-limit-republicans-democrats. Accessed 8 Oct. 2021.
Bolton, Alexander. “Senate Poised to Stave off Debt Crisis | TheHill.” TheHill, The Hill, 6 Oct. 2021, thehill.com/homenews/senate/575659-senate-poised-to-stave-off-debt-crisis. Accessed 8 Oct. 2021.
“Opinion | Why Does Congress Keep Playing Chicken with the Debt Ceiling?” The New York Times, 2021, www.nytimes.com/2021/10/07/opinion/debt-ceiling-congress.html. Accessed 8 Oct. 2021.
Cabello, Marcos. “The US Debt Ceiling: What It Is and What Happens If Congress Doesn’t Raise It.” CNET, CNET, 8 Oct. 2021, www.cnet.com/personal-finance/us-debt-ceiling-what-it-is-and-what-happens-if-congress-doesnt-raise-it/. Accessed 8 Oct. 2021.
Smith, David. “Biden Warns ‘Meteor Headed to Crash’ into US Economy amid Debt Struggle.” The Guardian, The Guardian, 4 Oct. 2021, www.theguardian.com/us-news/2021/oct/04/joe-biden-debt-limit-republicans-democrats. Accessed 8 Oct. 2021.
Bolton, Alexander. “Senate Poised to Stave off Debt Crisis | TheHill.” TheHill, The Hill, 6 Oct. 2021, thehill.com/homenews/senate/575659-senate-poised-to-stave-off-debt-crisis. Accessed 8 Oct. 2021.
“Opinion | Why Does Congress Keep Playing Chicken with the Debt Ceiling?” The New York Times, 2021, www.nytimes.com/2021/10/07/opinion/debt-ceiling-congress.html. Accessed 8 Oct. 2021.
Cabello, Marcos. “The US Debt Ceiling: What It Is and What Happens If Congress Doesn’t Raise It.” CNET, CNET, 8 Oct. 2021, www.cnet.com/personal-finance/us-debt-ceiling-what-it-is-and-what-happens-if-congress-doesnt-raise-it/. Accessed 8 Oct. 2021.