The US Met its Debt Limit: What Now?
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Even after Congress raised the debt limit in December of 2021, just one month later, the US met it again at $31.4 trillion in January of 2023. Since last year, the tides have changed and the House is now controlled by Republicans while the presidency is resided by Democrat Biden. This shift in the political makeup of Congress has created much dispute over what to do next in order to prevent a catastrophic economic crisis.
In a letter to Congress, Treasury Secretary Janet L. Yellen said that the government would begin using “extraordinary measures” to prevent the nation from failing to meet the legal obligations of all of the nation's accumulated loans— also known as a default. These "extraordinary measures" included suspending some contributions and investment redemptions for retirement and healthcare funds of government workers in order to allocate funds towards the government's immediate expenses. Although these efforts would be enough to prolong economic default until June, Yellen still requests that Congress decide on a more permanent action plan in order to resolve this issue. However, due to the extreme partisanship within the lawmakers, a general consensus has yet to be found on the horizon. President Biden and the rest of the Democratic Party are in support of issuing a clean increase to the debt capacity. This new capacity would raise the amount the US can borrow to meet its spending obligations, allowing existing financial and welfare programs to be sustained. Republicans, on the other hand, have vowed that they will not extend the borrowing limit again, as it has been expanded more than 80 times now, unless President Biden agrees to excessive cuts in federal spending. However, with President Biden refusing to negotiate with the Republicans on this issue and with signs indicating that the GOP is willing to allow the country to default otherwise, the ability of lawmakers to alleviate this situation has been jeopardized.
In reality, regardless of political ideologies, it is undeniable that both parties have approved policies that fueled the growth in government borrowing. Over the past two decades, Republican-controlled Congresses have consistently approved tax cuts, while Democrats have implemented spending programs that were not always matched by sufficient tax increases. Additionally, both parties have supported significant economic aid packages aimed at helping individuals and businesses weather the financial fallout of events such as the 2008 financial crisis and the 2020 pandemic recession.
If nothing is decided upon by June, chances that the US will not be able to pay its bills and default on its debt obligations for the first time ever are extremely high. This default would lead to an increase in borrowing costs and potential delays in receiving government checks, such as Social Security or military pay, affecting millions of Americans. Financial markets would be struck with instability, and a potentially avoidable recession in the world's largest economy would occur. However, Yellen states that even if a decision is not agreed upon by June, this plan could be used to prolong the default as long as possible. Nonetheless, a prolonged default would be equally hazardous as it may result in market crashes and layoffs driven by panic. Thus, the US is faced with a political stalemate. If the nation continues down this path, the future of its economy grows weaker and threats of a disastrous crash grows stronger.
