The US government is once again grappling with the task of reaching a bipartisan agreement. The topic on the table this time is the US debt ceiling. As you hear news stories about it, you may wonder what is the debt ceiling anyway? The debt ceiling is the maximum authorized amount that the US government can borrow. The US reached that maximum in January 2023. But why should you care? Because the anticipated consequences of falling on “default” would affect households across the US. The “default” scenario occurs if the government fails to reach a consensus to raise the ceiling in time for the upcoming deadline – June 1, 2023. No raised ceiling equals the government can’t pay for its ongoing expenses. That’s like an earthquake for the economic situation.
Firstly, what is this “default” that keeps being mentioned? To “default on debt” refers to not being able to make payments on a loan. In common scenarios, this might look like failing to pay a mortgage. We know that failure in paying your mortgage can lead to a lower credit score, and even foreclosures. Various economists, new reports, and analysts agree that the economy is sure to see large scale disruption if the US defaults on debt. According to cfs.org, “Default could cause the loss of 3 million jobs, add $130,000 to the cost of an average 30-year mortgage, and raise interest rates enough to increase the national debt by $850 billion.” Since the economy is relatively interdependent, there will be domino effects which may include higher interest rates, the dollar value depreciating, budget cuts in government-funded programs and sectors, etc.
I asked my peers at Berkeley High School about what questions or comments they have on the issue. The average response from most was something along the lines of “I don’t know much about the debt ceiling.” BHS junior Luca Vicisano said “I think the debt ceiling should be abolished. It’s an arbitrary number.” Another junior, Phoeben Worku, questioned the concept, asking, “Why do we need the debt ceiling?” Both student statements question the legitimacy of and the reasoning behind having a debt ceiling in the first place. Is it truly an arbitrary number?
The debt ceiling was established during WW1 when the US government wanted to issue bonds for funds as well as allow the treasury department to manage the debt more. There were legislators at the time who were opposed to the idea of issuing bonds as the funds would be used towards US involvement in the war. To work around that, Congress put the debt limit in place. Ever since then, we have been pushing the ceiling higher up so we can avoid defaulting. Many people in the present day like the sound of something limiting the government from racking on infinite amounts of debt. But, ideas of abolishing the debt ceiling concept aren’t unheard of. Experts from various institutions argue that the debt ceiling needs to be eliminated. In fact, this was proposed to President Joe Biden in 2022 by congressional Democrats. But, Biden rejected it while calling it an “irresponsible” approach.
The debt ceiling is an ongoing conversation with many looming questions and concerns. This short column can’t do the topic justice, I encourage you to delve into the concept a bit yourself with follow up questions such as, “Why can’t we abolish the debt ceiling?”