This week our civics reporter Felipe De La Hoz covers the debt ceiling. Bipartisan talks on the matter have dominated the news cycle, and failure for the parties to reach an agreement by the June 1 deadline would have devastating and widespread effects. But what even is the debt ceiling? Allow us to break down what’s going on.
Hi, Felipe, thanks for explaining the debt ceiling. Umm, to start, can you even explain what a debt ceiling is?
This is one of those things that becomes a huge political and governmental issue every so often without most people really even understanding what it means, so it’s worth breaking down in very basic terms. Essentially, the U.S. federal government has the particularity that it runs essentially on public debt, differentiating it a bit from, for example, local and state governments that can run temporary deficits but must generally balance their budgets.
The staggering cost of our federal programs, running the gamut from social safety net programs like Medicare to payment for federal salaries and the armed forces to servicing maturing existing debt means that the government routinely spends significantly more than it actually brings in in revenues, a discrepancy known as the deficit. To fill the gap, the government borrows huge quantities of money from all sorts of sources, including even individual investors that can purchase Treasury securities. All the ways that debt is functionally issued is too complex to break down in detail here, but it’s held by investors, other countries, and even the federal government itself.
Deficits have always been too large
Some policymakers and economists have long fretted that these deficits are too large, comparing the situation to someone borrowing unsustainable amounts on a credit card, but it is quite a bit more complicated when dealing with an entity as large and globally significant as the U.S. government. For one thing, it can issue more dollars, which happens to be a global reserve currency, and decades of trust in the servicing of its debt means it can always borrow more at very low interest rates. Despite periodic concerns that the debt load and the ratio to GDP have gotten unsustainable, the government’s level of borrowing has never really presented a concrete economic problem.
Now, this borrowing isn’t unlimited, and in fact has a cap authorized by Congress. Essentially, the whole of the federal government can borrow up to a certain amount, which is currently $31.4 trillion (numbers at these echelons get hard to even conceptualize, so think about it like this: picture a million dollars. Got it? Now take that million dollars and multiply it by a million. So one million, a million times over. Now multiply that 31 times. That’s how much the debt ceiling is). We actually hit that figure months ago, in January, but the Treasury is able to engage in a variety of accounting tricks to stave off an actual inability to meet federal obligations.
Basically, the government can’t borrow any more money for the time being, and meanwhile bills keep coming due. The added “fun” here is that we don’t actually know when exactly these tricks will stop working and we actually won’t be able to, for example, keep disbursing entitlement funds or servicing debt, given how multifaceted the system of tax receipts and federal spending is. Estimates range from next week to sometime in August, with Treasury Secretary Janet Yellen telling lawmakers this week that the date is likely to come June 1, or next Thursday.
A ticking time bomb with an invisible trigger
That means we have, in effect, a ticking time bomb without a visible timer, which isn’t great. The holdup now is that House Republicans want to tie a routine debt ceiling increase to significant spending cuts, many around social services programs, obviously one of the party’s frequent hobby horses. Cutting things like Social Security is very unpopular and generally a political nonstarter, but the threat to molotov the U.S. and global economies over it is powerful leverage indeed, and so the White House has been engaging in talks to reach some sort of compromise, despite earlier assertions that it wouldn’t compromise.
Some prominent Democrats have pushed President Biden to invoke the 14th Amendment, which reads in part that “the validity of the public debt of the United States, authorized by law… shall not be questioned,” or to order the Treasury to mint a platinum coin worth a $1 trillion or more and deposit it with the Federal Reserve (a quirk in the law gives the government the power to do this with platinum coins specifically). Biden, however, seems skittish about the prospect of these measures before the Supreme Court, and so has kept up the negotiations, which don’t seem to be going anywhere for now. Longtime political observers will recognize that we’ve had a version of this song and dance before, most notably in 2011, when Congressional Republicans pulled more or less the same trick with then-President Obama.
What happens if the U.S. defaults on debt?
The short answer is: nothing good. While we’ve come too close for comfort a couple times before and even that’s had some negative impact on the U.S. economy. We’ve already technically hit the debt ceiling and the stock market is down, but all of that is child’s play compared to what happens if we actually fully default on the debt. For one thing, it might mean a permanent downgrade of the U.S. government’s credit rating, which functionally will mean that U.S. bonds will no longer be seen as a gold standard for safe investments and interest rates on U.S. debt will go up, which will bring interest rates of all sorts up with it. Prepare, for example, for mortgage rates and other types of interest-based loans to skyrocket.
That’s just the tip of the iceberg though. The government would quickly find itself unable to disburse programs like SNAP and Medicare, pay federal salaries and benefits, and make other necessary payments to keep itself running. Moody’s Analytics predicted that millions of U.S. jobs could be lost within weeks, and market turmoil would wipe out trillions of household wealth. That’s not to mention the broader global economy, of which U.S. debt is a significant part. In the worst-case scenario, we’d be facing a global recession that would make 2008 look like a picnic.
It’s worth pausing here just to reemphasize that no actual economic circumstances would be triggering this meltdown; it would purely be a politically driven self-inflicted catastrophe, which means, hopefully, someone is going to blink here. Political dynamics have reached some truly ridiculous places in the last couple of decades, but I have to believe that we’re not driving the car off the cliff here just because we can. Let’s hope I’m not wrong.
What does this mean for New York City? Why should we care?
Well, as much like we like to pretend New York City is its own little self-contained world, we are still part of the U.S. and global economies, and this type of cataclysm won’t leave anyone unscathed. NYC already had a slower jobs recovery in the post-Covidworld, and faces a number of troubling budget dynamics that we’ve explored prior. From a concrete perspective, days out from the debt default, New Yorkers could stop receiving federally funded benefits, including housing and food assistance. Given the precarity under which a lot of people are living, this would obviously be disastrous even if it went on for just a couple weeks, and have lasting consequences beyond whatever debt ceiling resolution is reached.
Federal employees would also stop receiving pay, any retail investments would take a significant hit, and the economy-wide repercussions could mean hundreds of thousands of jobs lost in a short span of time, all of which would, again, feature long-standing consequences even if the default is resolved relatively quickly. Economic stability is something that often takes years to build up but can be wiped out in a month, and playing with fire here could get a whole lot of people burned.
While we have you, how is the economy doing? And how is New York City’s economy doing? What does that have to do with the debt ceiling?
As I mention above, the economy is already teetering a little on the prospect of a debt default, even if one hasn’t materialized yet. Nonetheless, the economy writ large seems to actually be in a significantly better place than a lot of observers expected it to be even just a year ago, when there were plenty of recession jitters and folks worried that the Federal Reserve’s program of interest rate hikes to deal with inflation would crash-land.
Speaking of, inflation remains a bit high, but it isn’t spiraling in the way a lot of people feared (one could say, as I did at the time, that the main driver wasn’t so much strong wages as supply chain issues that were out of the Fed’s hands, but that’s a gripe for another moment). Hiring has remained pretty strong even as inflation has more or less stabilized, and while some industries, notably tech and media, have seen waves of layoffs, that hasn’t spread out to the labor force writ large. Some significant bank failures have put people on edge, but the initial failure was for Silicon Valley Bank, which was uniquely vulnerable to interest hikes given its depositor population.
All of that to say that the economy is, basically, fine, better than many expected. New York City has been a little slow on the draw with the pandemic recovery, but hiring has picked up lately. There are some storm clouds on the horizon, including concerns over the labor impact of increasingly sophisticated AI tools — with knowledge worker types warily eyeing the rapid adoption of tools like ChatGPT — but it’s a bit too early to confidently predict just how this will all pan out. The main cause of concern now, by far, is that debt default bomb, ticking away in Washington, D.C.