Debt limit debate: Here's why it matters

July 18, 2011|By Robert P. Singh

There is a grave and gathering threat to the nation. It is not some shadowy foreign terrorist group or a runaway asteroid that threatens to destroy us. Unlike the plots of summer blockbusters, we are not menaced by evil wizards, mutants or rising armies of the undead. No, the threat we face is real, dangerous — and of our own doing. I am referring to the failure of our political leaders to raise the U.S. debt ceiling.

Most people do not fully understand trillion-dollar deficits, the national debt, or what the debt ceiling is, so let's be clear on what we are talking about. There are structural imbalances in government operations that have resulted in the U.S. government spending far more than it takes in from tax revenues. Contrary to what some partisans claim, these deficits did not suddenly appear during the Obama administration; they have been a part of U.S. government finances since World War II. Over the last several decades, to cover the cash shortfalls, the government has borrowed a total of $14.3 trillion through the sale of U.S. Treasury bonds. Individuals and institutions buy the bonds and then earn interest on what they believe are safe investments backed by the full faith and credit of the United States. The government uses the cash to pay its bills.

Because U.S. Treasury bonds are so financially secure, interest rates on the bonds remain relatively low, which allows us to finance the debt at a very low rate. However, the U.S. Treasury Department is only authorized to sell bonds up to the nation's debt ceiling that is authorized by Congress. In May we hit the debt ceiling and can no longer borrow any more money (i.e., sell more U.S. Treasury bonds), yet we still have increasing financial obligations. The Treasury Department has managed to buy additional time through extraordinary measures, but the ability to continue doing so ends on August 2.

Americans should understand that raising the debt ceiling has been largely automatic because defaulting on our financial obligations has never been considered acceptable. To give some indication of how common raising the ceiling has been, it increased seven times during the Reagan administration, twice during the Clinton administration, and seven more times during the last Bush administration. So, claims that many Republicans now make that raising the debt ceiling is irresponsible are nothing more than political gamesmanship. In fact, every one of the members of the current Republican leadership in the Senate and the House has voted to raise the debt ceiling multiple times in the recent past.

Democrats and Republicans can and should argue vigorously about national priorities and budgets. They should debate which programs to cut or what tax loopholes to close, but they should not politicize the debt ceiling or hold it hostage and use it as a bargaining chip in those discussions and debates. The debt ceiling, in and of itself, does not increase debt. It just allows the U.S. government to manage its debt in an efficient manner. Not raising the ceiling would be beyond irresponsible because it would send the message that the U.S. government no longer accepts responsibility for its financial obligations.

Congress has had months to discuss the issue, yet we are now on the brink of defaulting on our nation's debt obligations. If that happens, everything from Social Security payments to war funding to food inspections would be at risk, and the fragile U.S. economy would be sent into a tailspin. A default would send shock waves across global markets, and the ensuing panic would result in major sell-offs on all major stock exchanges. The resulting crisis would force a panicked Congress to raise the debt ceiling within days of default — but the damage would already be done. Interest rates would spike as the dollar collapsed, and we would lose our nation's AAA credit rating, making it far more expensive to manage our national debt.

It gets worse. With the nation's credit significantly downgraded, we would be required to increase interest rates to attract new investors. A 1 percent increase in interest rates on Treasury bonds would result in $143 billion in additional interest payments per year. This is roughly comparable to what we spend on Homeland Security, the Department of Education, and the CIA combined per year. We would probably be looking at a 2 percent to 4 percent increase in interest rates, which could result in an additional half a trillion dollars per year in interest payments on our national debt. This would further explode the debt, and the higher interest rates would continue for at least a decade because investors would not easily forget that the U.S. defaulted on its obligations.

Time is running out. If Congress does not get its act together soon, we will all suffer the consequences of turning into the largest deadbeat in the history of the world.

Robert P. Singh is a professor of management at Morgan State University. His email is

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