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Could the U.S. hit its debt ceiling?
Dollar bill with tape measure
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TEXT OF STORY
Kai Ryssdal: We're going to skip the semi-obligatory 'Congress is coming back in session this week' story today in favor of something else. Some time this spring, lawmakers are going to have to vote on whether to raise the debt limit -- literally how much the government's allowed to borrow.
Marketplace's Nancy Marshall Genzer has more on a deadline that may seem far off, but is already shaping the economic debate.
Nancy Marshall Genzer: Republicans are using the debate over the debt ceiling as a bargaining chip. Some say they won't vote to raise it unless some federal spending is cut. There's been a lot of speculation in Washington about where the Republicans' ax might fall. Economist Robert Shapiro was an undersecretary of commerce in the Clinton administration.
Robert Shapiro: They will demand changes in health care reform and try to claim budget gains from that.
For example, by pushing to eliminate the mandate that everyone buy health insurance. Then the government wouldn't have to subsidize insurance for people who can't afford it. Other Republicans say restricting Social Security payments is their price for a yes vote on the debt ceiling. Limiting Social Security benefits for wealthy seniors. Or raising the retirement age. Veronique De Rugy is an economist at George Mason University.
Veronique De Rugy: Some reform in entitlement will happen. I think lawmakers are building up the courage to talk about reforming Social Security.
But will the budget hawks really vote against raising the debt limit if their demands aren't met? If the government hit the debt ceiling and couldn't borrow, the U.S. would default on its debt, forcing a government shutdown and hurting the global economy. Given that, Brookings political analyst Stephen Hess says:
Stephen Hess: A lot of this is trash talk. The idea that anyone is really prepared to put the U.S. government in bankruptcy is ludicrous.
Hess says the best we can hope for is the trash talk will set the scene for serious budget discussions in the future.
In Washington, I'm Nancy Marshall Genzer for Marketplace.
I'd like to see Paddy Hirsch and his whiteboard explain the debt ceiling, because apparently very few people understand what it is and what it isn't.
The government has a variety of income sources, one of which is selling bonds. That's how the government borrows money, and that has to stop when the debt ceiling is hit. But other income sources *do not stop* when the debt ceiling is hit.
The government spends money on a whole bunch of different things, one of which is repaying money it owes. If the government decides to stop doing that, the government would default. But the government could decide to do that anytime, whether or not it's anywhere near the debt ceiling.
If the government hits its debt ceiling, it can only spend money from its other income sources. As long as that's enough to pay all of its creditors, default is unnecessary.
It is said that about 40% of current federal expenditures are funded by borrowing money. If we hit the debt ceiling, the government will (if this figure is correct) have to reduce its expenditures by 40%, and that's where things get interesting: That size reduction is impossible without touching the military or entitlements (or both). Especially since "paying creditors" is probably the number one item on the "must pay" list.
IMHO, this could be a fascinating whiteboard podcast (and it has been awhile since the last one). Please, Paddy?
