How the United States government manages its budget is inefficient and harmful to the economy. Congress passes two sets of laws every year: one that sets tax rates and one that sets spending levels. If Congress spends more money than it collects in taxes, it creates a budget deficit. To cover the deficit, the government borrows money from investors, which increases the national debt.
So the debt ceiling is the maximum amount of money the US Treasury can borrow to fund the government and pay its bills. It is the difference between the government’s spending and revenue.
The first debt ceiling was imposed in 1939 when Congress imposed a general restriction on government debt, known as the debt ceiling, that rather than automatically authorizing the Treasury to borrow much money however is necessary to cover this deficit, it prohibits the Treasury from borrowing more than a set amount of funds. The law eliminated previous separate limits and established an initial limit of $65 billion.
Congress has revised the debt ceiling 78 times since 1960. Strangely, this complicated way of authorizing borrowing improves the previous system. Before 1917, Congress had to approve every new issuance of Treasury bonds.
Nothing changes if Congress agrees to increase the debt limit. The Treasury will keep paying for all the federal programs and services that Congress has authorized and will keep borrowing money when needed.
Failing to raise the debt ceiling would have disastrous economic consequences. It will cause the United States to default on some of its financial obligations, triggering the same spiral of reduced creditworthiness that faces consumers who refuse to pay their credit card bills. According to Mark Zandi, the chief economist of Moody’s Analytics, such a failure would cost 7 million jobs. Beth Ann Bovino, the top economist at Standard and Poor’s, warned in 2017 that a US government default would be worse than the 2008 Lehman Brothers collapse, wreaking havoc on markets and the economy.
Treasury Secretary Janet Yellen says she will run out of authority to borrow money by early June.
Among the monthly obligations paid by the Treasury:
- – Social Security benefits are disbursed to about 66 million retirees, disabled workers, and others on the third day of the month and on three Wednesdays each month. About $25 billion is sent each week.
- – About $40 billion is paid to Medicare Advantage insurers and Medicare Part D prescription drug plans on the first day of the month.
- – About $25 billion in pay or benefits for active-duty military members, civil service and military retirees, veterans, and Supplemental Security Income recipients is disbursed on the first day of the month.
- – Interest payments of varying amounts are made around the 15th and on the last day of each month.
- When the cash runs out, the Treasury would find themselves doing an ugly triage to decide which parts of the economy — Social Security? Medicare? National defense? — keep running and which ones get an IOU.
- Senate Majority Leader Chuck Schumer. Default says it would cause a “Social Security shutdown.”
- Goldman economists estimate that one-tenth of all economic activity would stop.
- At least 3 million jobs would be lost, according to the center-left think tank Third Way.
- Interest rates would skyrocket. Third Way estimates it would add an extra $130,000 to a typical home loan.
- Financial markets, which run partly on confidence, would fall into disarray, ushering in a recession.
- The US dollar, the world’s global reserve currency, would lose value as investors lose confidence in Treasuries.
House Republicans are using the debt ceiling to pressure President Joe Biden to make policy changes. They are telling Biden that they will cause an economic disaster by defaulting on the debt unless he agrees to spending cuts — such as reducing Medicaid or undoing much of Biden’s Inflation Reduction Act — that they could not get in a standard budget negotiation.
The question is whether the Constitution requires Congress to act on the debt limit. The 14th Amendment says that “the validity of the United States public debt… shall not be questioned.”
There are good legal reasons to think the debt ceiling violates the 14th Amendment, which says the validity of US debt “shall not be questioned.” But no court has ever decided if the debt ceiling is unconstitutional. And only one Supreme Court case has ever used the 14th Amendment’s Public Debt Clause — and that case, Perry v. United States, and that case, Perry v. United States (1935), did so only briefly. In that case, the Supreme Court reasoned that Congress could not use its power to regulate the value of money to invalidate its own contracts when it had borrowed money on the credit of the United States. The Court also stated that the power to borrow money on the credit of the United States implied a pledge of good faith and assurance of payment as stipulated, which could not be withdrawn or ignored by Congress.
Nevertheless, the legality of this law — which will make the nation default on its debts unless Congress prevents it — is uncertain. What is certain is that if Biden invokes the 14th Amendment and declares the debt ceiling law unconstitutional, it will be challenged in court.
The Treasury Department could continue to pay its bills as instructed by the President, regardless of the legal status of the debt ceiling set by Congress. Republican litigants will undoubtedly file a lawsuit, most likely in a federal judicial division where they can be sure the case will be heard by a right-wing Republican. If they do an adequate job of shopping around for a partisan judge, that judge could issue an order forbidding the Treasury from issuing any more bonds very quickly. The case will likely wind up before the Supreme Court in short order. With the Supreme Court constituted as it now is, with its 6-3 Republican supermajority, the outcome of a case like this is uncertain.
To reform its budget process, the United States government should enact a law that mandates a balanced budget every year. This would compel Congress to prioritize spending and curb the national debt. It would also foster more predictability about future government spending, stimulating the economy.
Ian Millhiser, a senior correspondent at **Vox** who covers the Supreme Court and the Constitution. He wrote an article titled “The Supreme Court just saved the US Economy from a Depression” on June 23, 2021, He also wrote a book called “The Agenda: How a Republican Supreme Court Is Reshaping America”
“There is some evidence that the present-day Supreme Court, despite its 6-3 Republican-appointed majority, is willing to set aside conservative ideology when necessary to protect the nation’s economy.”
“In Collins v. Yellen (2021), the Court heard a lawsuit claiming that potentially every single action taken by the Federal Housing Finance Agency (FHFA), an agency created in 2008 to prevent the US housing market from collapsing and bringing down the entire global economy with it, was null and void.
Ultimately, the Court voted 8-1 to leave the FHFA largely unmolested. Only Justice Neil Gorsuch accepted the arguments that could have triggered a global depression. If the Court had accepted this conclusion, it could have meant unraveling hundreds of billions of dollars worth of transactions and potentially triggering an economic depression.”