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A Primer on the Debt Ceiling Crisis

Economic Policy Brief #125 | By: Rosalind Gottfried | September 29, 2021

Header photo taken from: Financial Times

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Photo taken from: The Washington Post

Policy Summary

The deadline for Congress to pass a Bill to fund the government past the current fiscal year deadline of September 30th is fast approaching.  The Republicans blocked a bill which would extend government spending and suspend the debt ceiling.  The House passed the bill providing for government spending through December and suspending the debt ceiling through December 2022, after the mid-term elections. 

Republicans unanimously refuse to support a hike in the debt ceiling.  During the former administration, the debt ceiling was raised three times with bipartisan support and little public party wrangling.  In fact, the debt ceiling has been raised over 80 times since 1960.  The matter of raising the ceiling is urgent as even without a new Biden spending bill the US credit limit would need to be increased; 97% of the debt that precedes his administration.  Many Americans will suffer if the government shuts down:  50 million seniors will not receive their social security checks, parents will not receive their monthly child credit, troops won’t get paid and myriad other expenses incurred by the federal government will be in default.  The fallout can be catastrophic.  The economic recovery will likely fall into recession as interest rates spike, stock prices drop, and dollars of growth and increases in employment will suffer reverses.

The long-term consequences of a shutdown surround the issue of maintaining a suitable credit rating since that is essential to the functioning of the economy; the US always has made payments on time and consequently has been able to borrow money more cheaply than other nations.  If the country undergoes a change in its credit rating the result will be higher payments for everything depending on credit, ranging from mortgages, to loans, to credit card interest. 

Policy Analysis

There are two ways the Senate can proceed to raise the debt limit.  The House already has passed a Bill but the Senate is mired in partisan conflict and the Republicans refuse to be associated with any rise in the debt ceiling. 

The Treasury Secretary and the Federal Reserve officials all support a bill rising the debt limit.  Efforts to put a debt ceiling increase into the Biden spending plans have met with opposition, some of it from moderate Democrats.  

There could be a stand-alone bill for the debt increase which would need only 51 Senate votes, representing 48 Democrats, two independents, and Vice President Harris as supporters.  

Photo taken from: Robert Reich

Or the Senate could pass a Budget reconciliation bill which also would not require a single Republican vote though such a measure could be held up by legislators’ efforts to attach amendments to the Act, a situation which has held put the process in the past.  

 

The bottom line, failure to pass a debt ceiling increase would cause tens of millions of Americans hardships compounding those experienced from the pandemic and, perhaps more urgently, would extend financial hardship into the future by jeopardizing our long term credit rating.

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