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What happens when the US hits the debt ceiling? (lifted from AlterNet)
The U.S. government generally spends more than it takes in – $900 billion more in fiscal year 2019. Since March 1, borrowing to make up the difference is not possible. The government can spend only its cash on hand and its tax revenues.
Treasury Secretary Steven Mnuchin is now using “extraordinary measures” to conserve cash. One such measure is temporarily not funding retirement programs for government employees. The expectation is that once the ceiling is raised, the government would make up the difference.
As of July 15, the Treasury had $223 billion in cash – down from $264 billion at the start of the month. It is unclear how long this money will last. Expenditures and revenues fluctuate considerably; $200 billion can disappear in a matter of weeks.
The Bipartisan Policy Center fears that the U.S. could run out of cash in early September, although the country’s coffers may be empty even earlier. With Congress scheduled to take its annual August recess beginning July 26, something needs to be done soon.
If the cash is gone, decisions will have to be made about who gets paid with daily tax receipts. Government employees or contractors may not get paid in full. Loans to small businesses or college students may stop.
When the government can’t pay all its bills, it is technically in default. Some pundits have claimed that a government default would have dire economic consequences – soaring interest rates, markets in panic and maybe an economic depression.
Such fears seem overblown because once markets start panicking, Congress and the president usually act. This is exactly what happened in 2013 when Republicans sought to use the debt ceiling to defund Obamacare.
But we no longer live in normal political times. The major political parties are more polarized than ever. Earlier this year we endured the longest government shutdown in history over federal government spending priorities.
President Donald Trump wants the debt ceiling raised so that he can push his spending priorities for the next fiscal year, which include the military, border security and the border wall. Democrats also want to increase spending but in areas where Republicans want to see cuts: housing, education and the environment.
5. Is there a better way?
The U.S. is one of few countries with a debt ceiling. Other governments operate effectively without it. America could too.
Having a debt ceiling is dysfunctional. It makes it harder for the Treasury to pay bills when they come due.
The best solution would be to just scrap the ceiling altogether. Congress already approved the spending and the tax laws that require more debt; it shouldn’t have to approve the additional borrowing as well.
It should be remembered that the original debt ceiling was put in place because Congress couldn’t meet quickly and approve needed spending to fight a war. In 1917 cross-country travel was by rail, requiring days to get to Washington. This made some sense then. Today, not so much.
This is an updated version of an article originally published on July 19, 2017.
Steven Pressman, Professor of Economics, Colorado State University
This article is republished from The Conversation under a Creative Commons license. Read the original article.
What happens when the US hits the debt ceiling? (lifted from AlterNet)
The U.S. government generally spends more than it takes in – $900 billion more in fiscal year 2019. Since March 1, borrowing to make up the difference is not possible. The government can spend only its cash on hand and its tax revenues.
Treasury Secretary Steven Mnuchin is now using “extraordinary measures” to conserve cash. One such measure is temporarily not funding retirement programs for government employees. The expectation is that once the ceiling is raised, the government would make up the difference.
As of July 15, the Treasury had $223 billion in cash – down from $264 billion at the start of the month. It is unclear how long this money will last. Expenditures and revenues fluctuate considerably; $200 billion can disappear in a matter of weeks.
The Bipartisan Policy Center fears that the U.S. could run out of cash in early September, although the country’s coffers may be empty even earlier. With Congress scheduled to take its annual August recess beginning July 26, something needs to be done soon.
If the cash is gone, decisions will have to be made about who gets paid with daily tax receipts. Government employees or contractors may not get paid in full. Loans to small businesses or college students may stop.
When the government can’t pay all its bills, it is technically in default. Some pundits have claimed that a government default would have dire economic consequences – soaring interest rates, markets in panic and maybe an economic depression.
Such fears seem overblown because once markets start panicking, Congress and the president usually act. This is exactly what happened in 2013 when Republicans sought to use the debt ceiling to defund Obamacare.
But we no longer live in normal political times. The major political parties are more polarized than ever. Earlier this year we endured the longest government shutdown in history over federal government spending priorities.
President Donald Trump wants the debt ceiling raised so that he can push his spending priorities for the next fiscal year, which include the military, border security and the border wall. Democrats also want to increase spending but in areas where Republicans want to see cuts: housing, education and the environment.
5. Is there a better way?
The U.S. is one of few countries with a debt ceiling. Other governments operate effectively without it. America could too.
Having a debt ceiling is dysfunctional. It makes it harder for the Treasury to pay bills when they come due.
The best solution would be to just scrap the ceiling altogether. Congress already approved the spending and the tax laws that require more debt; it shouldn’t have to approve the additional borrowing as well.
It should be remembered that the original debt ceiling was put in place because Congress couldn’t meet quickly and approve needed spending to fight a war. In 1917 cross-country travel was by rail, requiring days to get to Washington. This made some sense then. Today, not so much.
This is an updated version of an article originally published on July 19, 2017.
Steven Pressman, Professor of Economics, Colorado State University
This article is republished from The Conversation under a Creative Commons license. Read the original article.
