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The Debt Ceiling Showdown

Friday, July 1st, 2011

The drama over the debt ceiling came to a head a few days ago, when the remaining Republican senators walked out of bipartisan negotiations. Now President Obama has prodded Congress into working through a scheduled July 4 recess to break the impasse.

What is this issue about? Very briefly, the Constitution requires Congress to authorize the Treasury Department to raise funds to pay back debt. The “debt ceiling” is a blanket authorization allowing Treasury to raise funds up to that point.  When that ceiling is reached Treasury must go back to Congress and ask for a higher authorization, or else it lacks the funds to pay bills.

Republicans in Congress say the debt ceiling shouldn’t be raised without cutting a lot of spending out of the federal budget. Vice President Joe Biden has been leading negotiations with a bipartisan group of legislators trying to work out a budget deal that will appease the Republicans. We don’t know all the details of the negotiations, but Republicans in Congress have said they want cuts in Medicare and Medicaid, plus a lot of other programs that are meant to help working people, retirees, and the poor.

If they go through, many of these cuts will fall very hard on older people, who are more likely to suffer severe health problems such as mesothelioma.

Democrats say they have agreed to $1 trillion in budget cuts over the next ten years, but the Republicans want a lot more. The Democrats counter that cutting too much federal spending at once will take money out of circulation, which will hurt the economy. They also point out that much of the deficit was caused by tax cuts passed by the Bush Administration, and that allowing some of those cuts to expire — in particular for the wealthy — would enormously reduce the need to cut essential programs.

But Republicans walked out of the deal rather than consider any tax increase at all. This includes cutting special tax exemptions for corporate jets and hedge fund managers. The Democrats say it is insane to talk about cutting medical care for retirees but not subsidies for luxuries enjoyed by CEOs.

What is at stake? If the debt ceiling isn’t raised by August 2, the United States will default on its debts. This has not happened before in our history, so we can’t look at a past example to know what will happen. We do know that if the ceiling isn’t raised in about three weeks, Standard & Poors and other financial services companies will downgrade America’s credit rating, which will cause increase the interest we have to pay on the national debt.

This increase is very likely irreversible.  If Congress does not raise the debt ceiling, it will be much harder for the U.S. to reduce the national debt than it would have been otherwise. This much is certain.

Sheila Bair, outgoing chairperson of the Federal Deposit Insurance Corporation, testified to Congress this week that the consequences of even a short-term default could be catastrophic. Among other things, the default could change interest rates in a way that would hurt consumers and businesses.

Even getting close to default, Bair said, could have consequences, because the nation’s credit rating will be reduced  — “you’ve increased interest costs, you’ve increased Treasury’s borrowing costs and you’ve created a bigger deficit problem. So why even go there? Why even flirt with it? I just don’t understand it – it’s very harmful and will make the budget deficit worse.”