What's the deal with the debt ceiling, anyway? The federal government has always had debt. How much is too much, and how do politicians exploit it? This episode originally dropped in August 2022, but since the subject is in the news, we've been getting lots of questions about it!
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Since our nation's founding, the federal government has borrowed money from other governments, private investors, and businesses in order to operate. Over the last century, the debt ceiling, a Congressional cap on how much debt we can have, keeps getting higher and higher. We talk about how the national debt works, how it's been used as political leverage, and how that impacts the health of our economy.
Louise Sheiner, senior economics fellow at the Brookings Institution, and Michael Dorf, Constitutional law professor at Cornell Law, help us make sense of trillions of dollars in debt.
Listen here:
Transcript:
Hannah McCarthy: [00:00:01] Nick. I'm going to put you on the spot.
Nick Capodice: [00:00:03] All right. Okay.
Hannah McCarthy: [00:00:05] Do you think that you can guess our national debt to the nearest trillion dollar amount?
Nick Capodice: [00:00:10] When I was a child, I remember being $7 trillion.
Hannah McCarthy: [00:00:17] It's around 30 now.
Nick Capodice: [00:00:18] Wow.
Hannah McCarthy: [00:00:19] I mean, can you even fathom with $30 trillion? Looks like it's comically large.
Nick Capodice: [00:00:28] One of my father's favorite exercises was this. Do you know the thing about the difference between 1000000 seconds and 1000000000 seconds and 1000000000000 seconds?
Hannah McCarthy: [00:00:34] It is a trick question.
Nick Capodice: [00:00:35] No, no, no. 1000000 seconds was last week. It was 11 days ago. Oh, yeah. 1000000000 seconds is when you were born, Hannah. 31 years ago as 1000000000 seconds. 1000000000000 seconds is over 31,000 years ago.
Hannah McCarthy: [00:00:50] Exponential, man. 30 trillion is a huge number, right? Because when you and I are talking about large amounts of money, we're probably talking about, you know, maybe hundreds of thousands of dollars, maybe millions if we've got stars in our eyes. But 30 trillion, that's a lot.
Nick Capodice: [00:01:07] I mean, it doesn't sound good. Like, I feel like it's a bad sign when your debt is so large that it's basically unfathomable. And I feel like it's something politicians are always arguing about, but I don't really understand what that number means or why it matters.
Hannah McCarthy: [00:01:23] Well, let's dig into it. I'm Hannah McCarthy.
Nick Capodice: [00:01:26] I'm Nick Capodice.
Hannah McCarthy: [00:01:26] And this is Civics 101. And today we are talking about the national debt.
Clip: [00:01:41] We had four surplus budgets. I was president. But you can't balance the budget in a busted economy.
Hannah McCarthy: [00:01:49] The national debt is political. It's a frequently used jab against the president, and it's a favorite talking point in political ads.
Clip: [00:01:57] Then I learned about a new miracle drug made in Washington, D.C.. Spenditol. Spenditol is Washington's answer to all the painful problems Americans face.
Hannah McCarthy: [00:02:07] Politicians use the national debt as a tool when they're trying to get projects funded or defunded, especially those that will help their standing amongst their constituents.
Clip: [00:02:18] They want to run up $30 trillion worth of debt that we've got to pay back, by the way. If they want to do this.
Hannah McCarthy: [00:02:28] And ultimately it's a huge factor in our government's ability to function and in our country's financial health.
Clip: [00:02:34] And we're not going to accept this new normal of a weak economy, no new jobs and shrinking wages.
Clip: [00:02:40] We could prevent a catastrophic default with a simple majority vote tomorrow. If Republicans would just get out of the damn way, we could get this all done.
Nick Capodice: [00:02:57] All right, Hannah. So start off. What is the national debt? Why do we have it in the first place?
Louise Sheiner: [00:03:03] So we talk about the national debt. Most people are referring to the debt of the federal government.
Hannah McCarthy: [00:03:07] This is Louise Sheiner. She's the policy director at the Hutchins Center for Fiscal and Monetary Policy at the Brookings Institution. And before that, she worked as an economist with the Federal Reserve. She spoke with Civics 101 in 2017.
Louise Sheiner: [00:03:21] The debt is the total amount that we owe. So it's basically the amount that we've borrowed in the past, plus interest and not repaid.
Nick Capodice: [00:03:28] So how does this debt work? I assume it's not like a credit card or mortgage where you borrow a specific amount of money and you're expected to pay it back eventually from your income.
Louise Sheiner: [00:03:38] Well, so what happens is the other country writes a check to buy our bonds. So they hold our bonds, which means we owe them money.
Nick Capodice: [00:03:45] What does she mean by bonds? What are bonds?
Hannah McCarthy: [00:03:48] Yeah. Basically, the federal government has a revenue, mostly through taxes. But in order to afford expenses that outstrip revenue, it sells bonds. So a bond is a certificate that the government gives you, and it's a certificate saying, yes, we borrowed money from you and we're going to pay it back with interest.
Nick Capodice: [00:04:11] So it's like investing in the stock market, but you're really investing in the government?
Hannah McCarthy: [00:04:16] Yeah. These bonds help finance the federal government's day to day operations in addition to revenue that the government gets from things like taxes. Well, me think about it. War bonds. Yeah. War bonds were considered an act of patriotism. You are buying bonds because you want to support your government. But also your government isn't saying simply donate money to us. They're saying buy war bonds now. And eventually you were going to make that money back with interest.
Clip: [00:04:42] Funds to fund the freedom. But I'm selling any bonds. Do they scrape up the most you can. Here comes the freedom man.
Hannah McCarthy: [00:04:54] But nowadays, the majority of our debt, known as public debt, is owned by foreign countries like Japan, China, the U.K., even Luxembourg.
Nick Capodice: [00:05:06] Has our government always had a debt?
Louise Sheiner: [00:05:08] We started that way, and we've always had debt. And I think that many people understand that we need to have some level of debt, that it's actually healthy in an economy for the federal government to have some level of debt.
Hannah McCarthy: [00:05:18] Our country's debt traces all the way back to the revolution when the Continental Congress created an early version of a Treasury to help fund, what else, the war effort. Decades later, the establishment of the Treasury Department gave the federal government a more efficient way to do business with other countries, to demonstrate itself as an economic power by borrowing and lending and participating in the global market, which in turn provided funding for costs at home.
Nick Capodice: [00:05:46] This sounds kind of like a credit score. Like when you or I borrow money, we establish credit and we get a credit score. That, among other things, is used by banks and lenders to decide how financially sound we might be. Right.
Hannah McCarthy: [00:06:00] It's actually not too dissimilar for the federal government. Our government's financial relationships with other countries matter for our overall economic health. And by the way, the US government has its own credit rating.
Nick Capodice: [00:06:14] Really? So how much debt is too much debt?
Louise Sheiner: [00:06:17] There is some limit on how much we can owe because at some point people won't want to lend to us. But, you know, the United States government has sort of all of the potential revenues in the future going forward to pay off the debt. And so we can basically maintain a pretty high level of the debt, just keep borrowing every year, just as long as we don't let it keep growing as a share of GDP.
Hannah McCarthy: [00:06:42] Gdp. You know what that means, right?
Nick Capodice: [00:06:44] Yeah. Gross domestic product.
Hannah McCarthy: [00:06:45] It is the market value of our country's economy. It is the value of all of the goods and services produced in this country for a specific time frame. And the federal debt is measured against the GDP. So how much debt does the government have relative to how much money the economy is generating? In 2017, when we talk to Louise. The federal debt was about $14 trillion.
Nick Capodice: [00:07:11] Wow.
Louise Sheiner: [00:07:11] Which is about 75% of GDP. And at 75% of GDP, it's actually higher than it's ever been, except during World War Two when we had a lot of borrowing to finance World War Two. So some people would say 75% is quite high. We better take measures right now. Other people would say, look, 75, not so bad. We're doing just fine. But let's try to, you know, not let it go higher than that for a very long time. Or maybe a hundred's okay. There's really differences of opinion on that. Obviously.
Hannah McCarthy: [00:07:41] By the way, at the end of 2021, after nearly two years of a global pandemic, the debt to GDP ratio was estimated at around 137%. That is a huge jump, Nick, from the 75% Louise talked about back in 2017.
Nick Capodice: [00:07:59] That's massive. So it doesn't sound like there's like a set rule about how high our government's debt should be in proportion to the GDP.
Louise Sheiner: [00:08:07] Well, so that's an interesting question. We don't really know what level of debt is too high. I think we would have thought, you know, ten or 20 years ago that the current debt to GDP ratio at 75% if we got this high, would have had bad repercussions in terms of interest rates. So what our interest rates interest rates are how much people demand in order to lend to the government, right. So if they buy a treasury, they expect to get interest on it. So if they think that the probability that the government won't pay off the Treasury is high, like there's some probability of default, they might say, well, you know, I probably going to get paid back, but I may not. So you have to pay me a lot in interest.
Nick Capodice: [00:08:49] That makes sense. The likelihood that you're going to be able to pay that money back impact how willing someone is to take the risk of lending it to you and how much interest they'll charge you for lending you money.
Louise Sheiner: [00:09:02] Then all of a sudden the government would be having to pay very high amounts in interest, which means they'd either have to borrow even more or they'd have to cut spending or raise taxes kind of dramatically. And that's kind of the risk that you're going along. And all of a sudden interest rates go sky high or lenders refuse to lend to you, and then you have to make very rapid adjustments that can be quite painful.
Nick Capodice: [00:09:23] All right. So what happens if at the beginning of the year, for example, we've got a certain level of debt, but as the year goes on, the government is spending more money than they expected or the economy slowed down or something. So the debt's just getting bigger and bigger.
Hannah McCarthy: [00:09:38] Well, you're talking about is called the deficit.
Louise Sheiner: [00:09:43] Deficits are the amount that we borrow in any given year. And so to next year's debt is going to be last year's debt, plus this year's deficit. Right. So the debt is the total amount, the balance, and then the deficit is the change in any given year.
Nick Capodice: [00:09:59] Oh, the deficit rank. You know that song? Oh, yeah, the deficit rank.
Clip: [00:10:06] Those budget cuts can be a 12 digit drag. I'm telling you. That's the They really made a mess of Deficit rank. Thank you.
Hannah McCarthy: [00:10:16] I'm pretty sure that we could probably find a Simpsons reference for nearly every single episode of Civics one on one.
Nick Capodice: [00:10:22] So is there any kind of regulatory limit on how high our debt can go? Like some rule that says, stop, you cannot borrow any more money.
Hannah McCarthy: [00:10:31] That brings us to a little thing called the debt ceiling. And we'll get to that after the break.
Nick Capodice: [00:10:37] Just don't break it.
Hannah McCarthy: [00:10:39] Unless it's glass. But just a preview. We are one of the only countries with a debt ceiling, and it's been at the center of several political and financial crises in the past few decades.
Nick Capodice: [00:10:51] And real quick before the break. If you're the kind of person who would enjoy a Simpsons reference to the national debt versus the deficit, that's the sort of stuff we put in our biweekly newsletter. Extra credit. It's free, it's fun. And you can sign up at our website, civics101podcast.org.
Hannah McCarthy: [00:11:07] We're back and we're talking about the national debt.
Nick Capodice: [00:11:09] All right, Hannah, tell me about this debt ceiling, this special thing that the U.S. government has that most other countries don't.
Michael Dorf: [00:11:17] The debt ceiling is a federal statute that was first enacted in 1917 and has been periodically updated since then, which sets a dollar limit on the size of the debt that the United States can. O.
Hannah McCarthy: [00:11:32] Here's Michael Dorf. He's a constitutional law professor at Cornell University and civics one. One spoke with him in 2017.
Michael Dorf: [00:11:39] It includes both debt owed to the public and to private actors. And in addition, it includes debt that is held internally that is from one government account to another, so that the total figure is a little bit artificially inflated, but it's still a pretty large number. So interestingly, prior to 1917, there was no debt ceiling, but there also wasn't really regular borrowing.
Hannah McCarthy: [00:12:03] Before 1917, Congress was in charge of approving bond sales and loans in the Treasury.
Nick Capodice: [00:12:08] So basically every time the Treasury was planning to lend or borrow money, it had to go to Congress and be like, Hey, is this okay?
Hannah McCarthy: [00:12:16] Yeah.
Michael Dorf: [00:12:18] Essentially, the federal government did borrow money, but each time it borrowed substantial sums of money, Congress would pass a specific law that was authorizing that borrowing. Typically a bond issue.
Hannah McCarthy: [00:12:31] During World War One, Congress decided to give the Treasury more flexibility in managing the government's debt.
Michael Dorf: [00:12:39] The purpose of the debt ceiling originally was actually to empower the federal executive branch to borrow money without having to go back to Congress each time. Right. So when the Treasury floats a bond, it's relying on the authority that's provided in the same original statute as created the debt ceiling. So what was kind of a delegation from Congress to the executive branch saying here, go ahead, borrow money without having to come back to us each time.
Nick Capodice: [00:13:10] So what happens when the federal government reaches that debt ceiling?
Michael Dorf: [00:13:16] The debt ceiling doesn't prevent the United States from taking on obligations. What it does is it prevents the government from borrowing to meet those obligations. The spending is determined by the budget and by the non-discretionary elements of federal spending through entitlements. The debt ceiling doesn't prevent the government from having to pay that amount. It just says the government is not going to borrow the money to pay it. And therefore, as I said, sort of stiff people who are owed the money.
Hannah McCarthy: [00:13:45] This means that if the debt ceiling is not suspended or raised, the Treasury has to get creative about how to afford things it needs to pay for or risk defaulting on payments. And ideally, we don't reach this debt ceiling and Congress has some responsibility to prevent that from happening in the first place.
Michael Dorf: [00:14:02] The Congress has another means to control the size of the debt, which is it can adjust the laws governing how much they're going to spend, just spend less or how much is going to raise you tax more. That is to say debt is entirely a function of the difference between revenues and expenditures. What the debt ceiling does is to put an artificial cap on that that's unrelated to the actual difference between expenditures and revenues.
Nick Capodice: [00:14:32] So how does Congress figure out what that debt ceiling should be?
Michael Dorf: [00:14:37] Really, it's a function of how much time Congress wants to give itself until the next debt ceiling crisis. So they look at projected shortfalls of revenue over the next period and they figure, well, in about a year we'll have racked up another X billion dollars of debt. So we're going to raise the debt by X billion dollars, and that would be effectively giving themselves another year. They could say we're going to look two years out and give themselves twice that amount or whatever the the appropriate figure is. But it's really just an arbitrary number that is reached in highly political negotiations.
Nick Capodice: [00:15:20] Well, it sounds like Congress is sort of functioning from debt ceiling to debt ceiling. So what happens if this arbitrary number, as Michael calls it, is reached?
Hannah McCarthy: [00:15:31] The first and most common thing that happens is that Congress votes to raise or suspend the debt ceiling.
Nick Capodice: [00:15:36] Well, I mean, that seems kind of like cheating. How often has the debt ceiling been raised?
Hannah McCarthy: [00:15:43] The debt ceiling has been raised, suspended or revised 78 times since 1960.
Nick Capodice: [00:15:50] Wow. So it's gone up a lot. Has it ever been lowered?
Hannah McCarthy: [00:15:54] No, but the federal debt has gone down. So in some years there was more wiggle room for the federal government to borrow before it reached the ceiling.
Nick Capodice: [00:16:04] So basically when the government has reached that. Point of needing to go into debt over the debt ceiling rather than Congress holding to that ceiling and demanding that the Treasury find other ways to pay for things without going further into debt. They just raise the debt ceiling instead.
Hannah McCarthy: [00:16:19] Yes, usually. And most times the debt ceiling is not a hugely political debate in Congress because forcing the government to default on loans or de-fund government programs comes with huge consequences.
Michael Dorf: [00:16:34] So it seems like it's unnecessary and indeed it is unnecessary. There are really no other countries in the world that have a debt ceiling. They control their debt in the same way that you ordinarily would by controlling spending relative to taxes.
Nick Capodice: [00:16:52] So, Hannah, this is my big question. If this is usually the case, why do we have the debt ceiling at all?
Hannah McCarthy: [00:16:58] Well, sometimes rather than vote to raise the debt ceiling, legislators can use the debt ceiling and the threat of defaulting as a tool for getting their own agenda across, especially if they're looking to defund a policy or program that they disagree with.
Clip: [00:17:14] Now comes the president and the Senate majority leader demanding that this House of Representatives surrender. We will not surrender. We're fighting for the American people.
Louise Sheiner: [00:17:24] You know, I think what's interesting is people are always making tradeoffs, right? Nobody likes a lot of debt, but they also like certain policies.
Hannah McCarthy: [00:17:34] Again, this is Louise Sheiner.
Louise Sheiner: [00:17:35] So the reason it gets very partizan is, you know, if I'm choosing between policies that aren't consistent with my values, let's say I'm a Republican and there's a Democratic administration and they're saying, oh, you can have Democratic values. We're going to spend more money on things that Democrats care about. You might say, well, I don't want to do that, so I'd rather reduce the debt.
Michael Dorf: [00:17:56] You would wonder, well, which side in such negotiations wants to keep that number smaller. And the answer is whichever side thinks that having another debt ceiling crisis sooner rather than later is going to give them additional leverage.
Clip: [00:18:10] And the American people don't want the president's health care bill and they don't want the government to shut down. Republicans are listening. We passed a bill last week that would do just what the American people have asked.
Louise Sheiner: [00:18:22] And then when it comes to a Republican administration and they want to do things that are consistent with Republican values, like cutting taxes, then the Democrats would say, well, I don't want to do that. I'd rather reduce the debt.
Hannah McCarthy: [00:18:35] There have been several debt ceiling crises in the past few decades where it looked like Congress might not raise the debt ceiling. For example, in 2013, Republicans in Congress vowed to vote against raising the debt ceiling unless President Obama agreed to defund the Affordable Care Act.
Clip: [00:18:52] We should get something for furthermore our kids future. I'm afraid Democrats just could care less.
Hannah McCarthy: [00:18:58] Eventually, the government went into partial shutdown and the clock kept ticking closer to when the Treasury warned it would be too late to prevent defaulting on loans or having to take drastic measures to fund the government.
Clip: [00:19:11] The government has been shut down since last week. The country could default next week and the president and House Speaker spent the day talking past each other. If Congress doesn't pass this debt ceiling in the next few weeks, the United States will default on its obligations. That's never happened in American history. Basically America becomes a deadbeat.
Hannah McCarthy: [00:19:38] Less than 23 hours before the federal government was going to default on its loans, Congress voted to suspend the debt ceiling for a few months.
Clip: [00:19:48] It's time for a reality check. Defunding Obamacare did not work as a strategy. So let's find common ground and work together.
Hannah McCarthy: [00:19:58] So even when the government has reached that debt ceiling, the government has not stopped paying its loans. The government has never intentionally defaulted on loan payments. However, this move in 2013 did hurt the approval rating of the Republican Party and harmed the country's credit rating.
Nick Capodice: [00:20:17] Quick aside to listeners, we actually did a whole episode on government shutdowns, which happened when Congress can't agree on a budget. So check that out if you're interested. So, Hannah, what's the connection between a debt ceiling crisis and a government shutdown?
Michael Dorf: [00:20:31] I want to distinguish between a government shutdown and a debt ceiling crisis. Government shutdowns occur when Congress doesn't allocate funding for particular measures, either because they fail to pass a budget, or they fail to pass a continuing resolution that extends the existing budget. Each of the government shutdowns we've had in the past few decades have been a result of that kind of a standoff, a failure to enact a budget. The government never defaulted in any of those cases. That is to say there was sufficient borrowing authority for the government to meet its outstanding obligations. It's just that additional and new services weren't being provided because there wasn't sufficient money allocated. There wasn't any money allocated.
Nick Capodice: [00:21:23] You know, it's so interesting to me that the threat of this kind of default has given politicians leverage to try to defund or reduce the funding of certain programs they don't like, even though that kind of default would be catastrophic for people's everyday lives. And not only just because it would mean that people didn't have access to government services or funding, but because it would seriously damage our relationships with countries, private individuals, businesses that all hold our debt.
Hannah McCarthy: [00:21:52] Right. The national debt is always going to be political. But the debt ceiling has introduced another layer into those politics by using our country's financial reputation as a bargaining chip.
Louise Sheiner: [00:22:06] So it's very difficult to get out of the partizanship because there are trade offs right there. Reducing the debt might be good, but, you know, spending more on education if you care about education might be good, too. You know, I think Partizanship is here to stay, which is why you sort of it seems like we're going to have to get to a place where people start to get a little bit more nervous about the debt for people to say, okay, let's kind of compromise. But if it doesn't seem like an urgent thing and people have very different views on what should be done, it gets harder to get to. Yes. And to compromise.
Nick Capodice: [00:22:48] That is it for today. This episode was written and produced by Kristina Phillips, Hannah McCarthy and Mee Nick Capodice. Our staff includes Jackie Fulton and Rebecca Lovejoy is our executive producer.
Hannah McCarthy: [00:22:57] Music In this episode by Broke for Free, Kaslow Peerless Pulsed Scott Holmes New Deal Records, Audio Hurts, Shaolin Dub, Twin Music Tom and the artist who never raises the debt ceiling on his music Chris Zabriskie. Civics 101 is a production of NHPR, New Hampshire Public Radio that.