If Congress does not raise the debt ceiling by Thursday, the U.S. will default on its debt.
But what does this mean? It means that U.S. federal law says that there is an upper limit to the government’s debt beyond which the government has to stop borrowing. If the government can no longer borrow, it will not be able to pay off its obligations, and the bonds and notes the government issues will go into default.
Yes — the U.S. has already reached its current debt limit. The U.S. reached the current debt limit of $16.699 trillion this past May, but has had sufficient funds to continue to pay its bills. But according to the Obama administration, if the debt ceiling is not raised, and thus the U.S. government cannot borrow more funds, the government will run out of money on Oct. 17. At this point, it will no longer be able to pay it for its outlays, triggering a default.
How did the debt ceiling come about? Surprisingly, there is nothing about a debt ceiling in the Constitution. Rather, Congress and the President created it in 1917 with the passing of the Second Liberty Act. Since then, Congress has been continually raising the ceiling. In fact, it has done so 74 times in the last 51 years, according to the Congressional Research Service, making the ceiling almost arbitrary. But this year, a standoff in Congress has changed the situation. Congressional leaders have been using the threat of a government default as a bargaining tool.
But if it’s not in the Constitution, why on earth does the debt ceiling exist?
In the words of Dr. Daniel Hamermesh, the Sue Killam Professor in the Foundation of Economics at the University of Texas at Austin, “The debt ceiling is a self-inflicted wound that the legislature and the president tied their hands with. No other country does this... It has become a bargaining tool, although in a better world, we shouldn’t have this.”
So this year, what exactly is being bargained for or against? And why hasn’t Congress raised the ceiling already?
At the most basic level, the fight this year is over the Affordable Care Act, or Obamacare, a health care platform that House Republicans have tried to repeal or undermine at least 42 times, according to CNN. Now, members of the Tea Party, or right-wing Republicans, have decided to use the threat of a looming default to try to defund the Affordable Care Act, or Obamacare. This is no secret agenda. In fact, one of the most vocal advocates of this strategy, Senator Ted Cruz, is a junior U.S. Senator from Texas.
What’s at stake? What happens if the U.S. defaults on its debt?
Honestly, no one knows. A U.S. default is unprecedented. While other countries — such as Argentina, Venezuela, Ecuador, and Belize — have found themselves in sovereign default, none of these nations’ currencies serve as the world’s benchmark currency the way the U.S. dollar does. Usually, during economic turmoil, investors buy what they U.S. Treasury bonds, seeing them as one of the safest investments. In this scenario, when the U.S. government’s sovereignty itself is at risk, it’s unclear what the global investment community will do.
Will investors continue to buy U.S. bonds? Will they move to a portfolio of currencies? One person’s guess is as good as any other’s. In either situation, though, the confidence of the people buying U.S. debt — individuals, institutional investors, large banks, and foreign governments such as China and Japan — will be shattered. And this diminishing confidence level will be the most detrimental effect of the default, much larger than the practical considerations of the government not being able to pay its bills.
Hamermesh agreed, saying that this crisis is slowly destroying the perception of the U.S. as the most stable place to put money. Interest rates will go up as well, and the increased uncertainty will cause investors to move their money out of the country.
As for the effects on UT, they would trickle down effect would harm funding. In truth though, if such a thing did occur, the big picture implication would be so catastrophic that it’s even hard to speculate specific effects on UT. And the longer this fight goes on in Congress, the more detrimental the effects will be.
Recently, there have been a number of stories in the media about an avenue President Obama could take to sidestep the Congress and resolve this crisis. Section four of the 14th Amendment of the U.S. constitution says the following: “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”
To Hamermesh’s eyes, this passage provides the grounds for Obama telling Congress, “the debt should not be questioned, I’m not going to let it be questioned. Therefore we are going to keep on writing checks.” A move that would in effect “leave Ted Cruz stomping up and down and crying.”
Other academics are not so certain that the solution is clear. Dr. Jack M Balkin, the Knight Professor of Constitutional Law and the First Amendment at Yale Law School, says on his blog that “the President does not have the unilateral power under Section four to disregard the debt ceiling.”
Balkin believes that the President needs Congressional authorization to do so. If he sidesteps the Congress, it’s likely he could be tried for impeachment. The Obama administration has also officially stated that the President does not have the power to end the crisis under the 14th Amendment.
So where does this leave us?
Our country is on the brink of unprecedented economic collapse in large part due to partisan politics. And yet, behind all the bickering, there is a vague certainty that the U.S. cannot default; that the government won’t. This sentiment seems reminiscent of the one held by numerous large institutions during the mortgage crisis years ago. But the truth is, no country is too big to fail, not even the world’s largest superpower. And we, as a country, need to realize this in order to uphold our esteemed status in the global community.
Should we as students at UT care? In the words of Dr. Hamermesh, if we are citizens of the U.S., and if we want to continue to live in a country that is viewed as the best in the world, we should certainty care. And one of the first steps to caring is to educate ourselves on what’s going on.
Malik is a Plan II and business honors sophomore from Austin.