With Treasury Secretary Janet Yellen warning of “an economic and financial catastrophe that will be of our own making,” the debt ceiling has become a subject of political brinkmanship. (Ting Shen/Bloomberg)
The very phrase "debt ceiling" sounds austere and restrictive, as if it's a lid on government spending. In fact, this cap on U.S. government borrowing affects only the ability to pay existing bills, not to approve more spending.
The issue still has the potential to roil financial markets, since a failure to raise the ceiling could eventually result in a first-ever default on some of the government's obligations. With Treasury Secretary Janet Yellen warning of "an economic and financial catastrophe that will be of our own making," the debt ceiling has become a subject of political brinkmanship. President Joe Biden has even considered invoking the U.S. Constitution's 14th Amendment — which guarantees the validity of public debt — as a way to solve the issue.
1. Where do things stand?
The U.S. is getting perilously close to the current federal debt limit of nearly $31.4 trillion, at which point it could lose the ability to meet all payment obligations. Yellen says that moment — the X-date, as it's known — could arrive by June 1.
Since mid-January, her department has been using so-called extraordinary measures — such as withholding regularly scheduled contributions to a federal employee retirement fund — to keep paying debts and delay the reckoning. Once those measures are exhausted, the options get more dire.
2. What happens if the U.S. defaults?
A wide variety of people and entities owed money by the U.S. government would face what normally is unthinkable — being stiffed (at least for a while) by Uncle Sam. These include Social Security recipients, members of the military, families with children, Medicare providers and holders of Treasury securities. There could be a partial government shutdown.
Failure to pay bondholders would have cascading effects, with credit rating agencies downgrading Treasury debt, leading to higher borrowing costs for the government, businesses and households. The U.S. economy "would quickly shift into reverse, with the depth of the losses a function of how long the breach lasted," according to the Council of Economic Advisers, part of the White House. "A protracted default would likely lead to severe damage to the economy, with job growth swinging from its current pace of robust gains to losses numbering in the millions." Just getting too close to the debt ceiling, as happened in 2011, could affect the U.S.'s credit rating and hurt consumer confidence.
3. Who wants to raise the debt ceiling?
Leaders of both major political parties acknowledge that the debt limit must be raised, because the gap between government spending and revenue is so large.
But Republicans, who took control of the House of Representatives on Jan. 3 and blame high inflation on spending during Biden's first two years in office, want to pair a debt limit hike with spending cuts. On April 26, House Republicans passed a bill that would raise the debt ceiling by $1.5 trillion in exchange for $4.8 trillion in budget deficit cuts over 10 years.
Speaker Kevin McCarthy has called that bill — which on its own stands little chance of passing the majority-Democratic Senate — an opening offer that he is willing to use to strike a deal with Biden, who has said that raising the debt ceiling is nonnegotiable and shouldn't be conditioned on any other action.
4. Does there have to be a debt ceiling?
Some budget experts and commentators want to abolish the debt ceiling, arguing that the periodic congressional battles over it increase economic uncertainty.
A variety of ideas to circumvent the limit have been rejected by previous administrations, including minting platinum coins and placing them in the Federal Reserve, or the Treasury issuing premium bonds.
By offering much higher interest rates, investors would bid up the bonds, providing cash to the government but shrinking the face value of the debt for the purpose of evading the debt limit. Another proposal has been to declare the debt limit a violation of the 14th Amendment.
5. What is the 14th Amendment?
This constitutional amendment, ratified in 1868, largely deals with rights of citizenship. However, it also states that the validity of the U.S. government's public debt "shall not be questioned." In other words, it is unconstitutional for the government to default on its debt.
Government lawyers could use this to craft an argument that it is also unconstitutional for Congress to impose any ceiling on the national debt if this leads to a default. However, writing in the New York Times, Harvard Law School professor emeritus Laurence Tribe said this raises difficult issues, including whether it could "open the door for dangerous presidential overreach, if Section 4 empowers the president single-handedly to declare laws he dislikes unconstitutional." Biden said he had considered invoking the 14th Amendment, but was concerned that federal courts could rule the maneuver illegal.
6. Why is there a debt ceiling?
Its creation, in 1917, made it easier to finance World War I by grouping bonds into different categories, easing the burden on Congress to approve each bond separately. With World War II looming in 1939, Congress created the first aggregate debt limit and gave the Treasury Department wide latitude on what bonds to issue. Raising the ceiling lets the government borrow to cover the gap between spending and taxes already approved by Congress.
7. When did it become a political issue?
The limit was routinely raised without incident until 1953. That year, approval was held up in the Senate in an attempt to restrain President Dwight Eisenhower, who had requested an increase to enable construction of the national highway system.
The limit has since been raised dozens of times, usually without a fight; both parties agreed to hikes under Republican President Donald Trump, for instance. But the past quarter century has seen the debt ceiling increasingly become a partisan weapon. Raising the debt ceiling was among the disputes that caused two shutdowns of the federal government in late 1995 and early 1996.
Another fight occurred in 2011, prompting Standard & Poor's to issue the first-ever downgrade of the U.S. government's credit rating. Consumer confidence plummeted as did poll ratings for Republicans in Congress and then-President Barack Obama, who agreed to more than $2 trillion in spending cuts over a decade to end the crisis. A second debt ceiling faceoff between Obama and Republicans, in 2013, resulted in the cap being suspended for the first time.
Bloomberg's Sarah Muller contributed to this report.
