Debt Ceiling Debacle

Over the coming weeks, we're going to hear a lot about the fight in Congress to raise the federal debt ceiling. With everything you read and hear, the most important point to remember is that the national debt represents spending Congress has already approved through prior legislation. It does not represent new spending.

Because we, as a country, spend more money on domestic programs, the military, national defense, etc. than we take in as revenue through taxes, the federal government has to take out loans to meet its debt obligations. Those loans take the form of U.S. Treasury bonds, which are considered good investments, as they pay regular interest and will be paid back in full on the bond's maturity date.

However, U.S. Treasury bonds are considered good investments precisely because they are "backed by the full faith and credit of the United States." In other words, the U.S. government reliably pays its bills on time.

You might question why the government should ever spend more than it takes in. Why not live within a balanced national budget? The reason is that sometimes, just as in our households and businesses, you have to take out a loan to pay for a purchase you have decided to make. As with all loans, a borrower needs to look at whether the purchase represents "good debt" or "bad debt."

Good debt is debt that will provide more value than it costs you to pay off your loan amount with interest. Bad debt, on the other hand, generally represents unbudgeted spending that you cannot afford or debt for items that will lose value over time.

Buying a home with a mortgage or a taking a business loan to purchase equipment that increases production would be considered "good debt." Putting a new television on a credit card you can't pay in full at the end of the month or taking a business loan to cover a business's operating expenses would be considered "bad debt."

On the national level, "good debt" represents loans that invest in a better future for all Americans. "Bad debt" is probably more difficult to define, because we might disagree on whether a particular federal program represents unbudgeted spending we cannot afford, so on a national level, it may be best to rely on answering the question that defines "good debt": Does this spending invest in a better future for all Americans?

This is the question that Congress answers when it passes legislation involving spending. When it comes to the national debt, this question has already been asked and answered, because the national debt represents spending Congress has already approved.

So far, so good. We have Congress authorizing spending and taxes and when we spend more than we earn, we take out loans. As the bills for those loans come due (remember that Treasury bonds are good investments because they pay regular interest and will be paid back in full at maturity), the federal government frequently hits its debt ceiling, or the total amount of money it is allowed to borrow to meet its existing legal obligations.

The debt ceiling does not limit Congressional spending or the amount the government needs to borrow. It simply limits the Treasury Department's ability to pay its debts and honor the financial obligations Congress has already made.

The coming fight in Congress over the debt ceiling comes down to a fight over whether we should pay our bills on time. Those bills won't go away, but the GOP can use the debt ceiling as a political weapon to attempt to force Democrats to place limits on future spending or revenues (taxes) or cut programs that were already authorized by Congress.

Failure to set the debt ceiling at the level necessary to meet borrowing needs would put the Treasury in a position where it is unable to pay the bills and send the government into default. Defaulting on federal payments could result in the U.S. failing to pay interest on or redeem bonds; missing payments for Social Security and salaries for federal civilian employees (including members of Congress) and the military; or temporarily suspending veterans' benefits, among other things.

That consequence alone would disrupt millions of individual lives for a short period of time, but the full weight of a default lies in the damage it would do to the United States' credit. Bonds are a good investment because they are backed by "the full faith and credit of the United States," and the United States is not a risky investment because it pays its debts on time.

However, think about what it would do to your credit history to default on a debt. Your interest rate would go up and your borrowing limit would be reduced because now you're a more risky loan prospect. The same would be true for the federal government. When the national debt is $24 trillion, an increase in just 2% to the interest rate investors are willing to accept to lend money to the federal government would represent $480 billion.

Those additional billions in debt would require the federal government to raise more money and that money would almost certainly be raised in tax revenues. And those tax revenues would be paid by average Americans...and our children and grandchildren.

Congressional spending represents loans that invest in a better future for all Americans. The fight over the debt ceiling is a game of political chicken that can only result in breaking promises already made to the American people or defaulting on the national debt. And default would undoubtedly damage the future of all Americans, not for a moment, but for years to come.

This is a good time to write to our House Representative, Nick Langworthy. Feel free to use this sample message or write one of your own!

He needs to know how you feel about the promises made to Americans through the American Rescue Plan Act, Infrastructure Investment and Jobs Act, Inflation Reduction Act, the PACT Act, Social Security, and Medicare. He needs to know how you feel about the consequences of a potential default. This kind of brinkmanship needs to stop and Congress must move on to governing, also known as the work of creating a better future for all Americans.