To default or not to default, that is the question
Congress faces big debt decisions

By Nicholas Locke · The Mainstream
Published May 10, 2011

When an average American earns $100 a day yet spends $140, most people call that irresponsible. The American government, however, has been demonstrating this type of fiscal behavior at an alarming rate. 

The U.S. debt cap, the limit on the amount of debt that the federal government is allowed to incur, was set at $11.5 billion in 1917. Commonly referred to as the “debt ceiling,” this amount has been raised multiple times since it was first adopted with the current ceiling sitting at $14.3 trillion. However, this amount is in danger of being surpassed very soon.

While some elected officials debate the worthiness of raising the limit, others see it as non-negotiable. Timothy F. Geithner, the U.S. secretary of the treasury, wrote in a letter to Congress, “Never in our history has Congress failed to increase the debt limit when necessary.” Yet there are some rumblings on the hill that outright object to raising the cap. “Failure to raise the limit would precipitate a default by the United States,” says Geithner. Geithner’s letter can be found on the U.S. Department of the Treasury website.

So the government is confronted with either a default or taking on more debt. What is the plan of action? One option is to default. On a personal level, defaulting is the failure to pay a debt and often ends with the repossession of goods. Predicting the fallout of such an action on a national scale would be near impossible. The prevailing thought among economists is that nothing good will become of a national default. Some predict an economic doomsday scenario. Others believe that it would teach us to simply live within our means.

If Congress votes to raise the ceiling, the deficit grows and the country will eventually hit the cap again. This cycle has happened every time the U.S. has raised the limit.

“They will have to raise the debt ceiling,” says UCC economics professor Kirkwood Donavin. “We have always had a debt.” Donavin, a self described optimist, expresses the belief that things will work out. “The Federal Reserve is independent so that will probably force the politicians to compromise . . . . Not doing so would be catastrophic in the long run.”

Not everyone is as sure as Donavin about the limit increase. The tea party Republicans are claiming they will only vote for the raise with major concessions from the current administration. “I don’t see myself voting for the debt limit,” says Rich Nugent, the freshman Republican Representative from Florida, in an interview provided with Bloomberg.com.

Representative Allen West, another Republican from Florida, refuses to vote for a raise in the debt limit unless the corporate tax rate is reduced as much as half, and government spending is realistically capped. He also wants to include a ban on funding for the administration’s health-care overhaul. “Those are the conditions,” West is quoted on Bloomberg.com “I’m not going to sit around and prove myself to be fiscally irresponsible.”

According to an article written on Money.CNN.com, the Congressional Research Service wrote in a report, “Congress would repeatedly face demands to raise the debt limit.”

What is the purpose of the cap in the first place? In theory, it is supposed to help Congress control spending. In reality, Congress fails to take the responsibility of setting benchmarks and sticking to them. When the budget is set, it is done with the expectation for the need to borrow money. The government has to be able to cover the difference between the total costs and incoming revenue, thus we incur the debt. The debt limit has been raised 10 times since 2001 according to the CRS. This issue could continue past this debate without possible reform in both the tax code and government spending.

With all of the information, Americans are left with plenty of questions. First and foremost, we ask, how will all of this affect me? Though economists can only speculate at this point, the likely scenarios are either a severe hike in interest rates from the Federal Reserve or the devaluation of the U.S. dollar due to putting more money into circulation. Either way, the local economy could be severely affected as much as the national and maybe even global economies. 

The debate is heating up as May 16 draws closer, the expected day we would break through the ceiling. Republican Senator Jim DeMint has threatened to filibuster a vote on raising the debt limit. A filibuster allows a lone member to extend the debate in order to delay or entirely prevent a vote on any given proposal. The Senator’s sentiment has obviously created some tensions among both parties.

The date, however, may be staved off for up to eight weeks, says Geithner in his April 4 letter to Congress. Commentators say that this will at least give both sides of the aisle some time to get past the politics and figure out both a short term and long term solution.