Should Congress Raise The Debt Ceiling? - Investopedia.com

Should Congress Raise The Debt Ceiling? - Investopedia.com
Posted: June 7, 2011 9:20AM by Tim Begany

The U.S. government is a lot like a person in that it can borrow money. Unlike people, though, with the approval of Congress, the government can raise itsdebt ceiling - the most its legally allowed to owe - if it hits the current limit. That's sort of like you and I being able to automatically up our credit limit if we've maxed out our cards. (For more on the national debt, read A Look At Government Bonds And National Debt)

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The government raises its debt ceiling often, doing so 74 times in the previous 49 years. It could happen again very soon - today, in fact. On Tuesday,Congress is scheduled to decide if the federal government can exceed the current debt ceiling of $14.3 trillion.

As you may be aware, the issue has caused heated debate this time around. Some members of Congress say the debt ceiling must be raised for the government to keep functioning. Others insist it's high time Uncle Sam learned how to get by without any more borrowing. Clearly, there are two sides to the story. The main pros and cons of raising the debt ceiling are summarized here.

Funding Crises Are Averted
All sorts of funding crises would ensue if the government suddenly couldn't borrow. For example, the U.S. Treasury Department says the government wouldn't have enough money to pay employees, contractors or military personnel. Those are very large groups that contribute greatly to the economy, so not paying them could help tip the U.S. back into recession. Though undesirable, taking on more debt would delay immediate catastrophes like these, buying time for the government to straighten out its finances in an orderly fashion. (To learn more, check out Explaining The World Through Macroeconomic Analysis.)

The U.S. Avoids Default
Since the government relies heavily on borrowing to make payments on existing debts, raising the debt ceiling would prevent default on those payments. Not raising the ceiling would result in America's first default ever, and some leaders of the financial community believe that would be disastrous.

Highly regarded investor Bill Gross, managing director of the bond investing firm PIMCO, is one such leader. According to Gross, it would be unwise to let the U.S. default because its debt plays a central role in world finance and trade. A U.S. default may severely undermine confidence in the financial system, triggering panic in financial markets around the world, Gross suggests.

Federal Reserve Chairman Ben Bernanke and Treasury Secretary Timothy Geithner also support raising the debt ceiling. Bernanke has described a failure to do so as a "recovery-ending event." According to Geithner, not raising the ceiling could spark high interest rates that lead to a worse financial crisis than the one the U.S. is still in the process of recovering from. (To learn more on how the US got into this situation, read Government Debt: From Billions To Trillions.)

The Government Gets Off the Hook – Again
Being able to raise the debt ceiling almost at a whim obviously hasn't been much of an incentive for the government to balance the budget and get out of debt. Thus, some politicians, investors and economists argue that not raising the ceiling is now the only way to curb federal spending.

That would, of course, result in a first-ever U.S. default, which would certainly be a painful situation. But those who oppose raising the debt ceiling reason that the emergency would force politicians to focus hard on the debt issue right now, not later. "[If] we were in a position of not being able to pay our debts in the short term, it would concentrate the politicians' minds dramatically," remarked New York University economist James Ramsey in an article on NPR.org. (For more on debt ceiling, check out Do You Need A Debt Ceiling?)

America's Debts Will Just Keep on Growing
A higher ceiling only compounds a debt burden that's already unsustainable. If borrowing and spending are left unchecked, the government could owe $20 trillion, maybe more, by 2020. By then, interest payments alone could reach $800 billion a year.

The Bottom Line
Regardless of Congress's decision, the U.S. is in a tough spot financially. But things are still far from hopeless. The U.S. has escaped severe financial trouble before, like it did after World War II, when debt levels were even higher (as a percentage of GDP) than they are now. Back then, the national debt was an all-time high of 121% of GDP. Today, we're at about 100% of GDP. So the U.S. has been in worse jams, and there's still time to get out of this one. (For more, check out A Look At Government Bonds And National Debt.)

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