Why the Debt Ceiling Crisis Could Send Us Spiraling Toward another Great Recession
NEW YORK ( MainStreet) We are in need of an imminent debt ceiling deal, but with all the fear over how a debt celing breach would impale the economy , it's easy to forget brass-tacks. For example, What exactly is the debt ceiling? How can I make an informed opinion about possible solutions?
To get some hard-boiled basics, MainStreet consulted Gabriel Chodorow-Reich, an associate of the department of economics at Harvard. His answers to our questions are below.
1) What exactly is the debt ceiling and how does it work?
GCR: The annual budget process sets the level of spending of the federal government. The interaction of the tax code and the level of taxable income determines revenue. When the level of spending mandated by Congress exceeds the revenue raised under the tax system, the federal government issues debt to cover the difference. Importantly, the issuance of new debt is the direct consequence of previous laws regarding taxes and spending. If Congress wanted to keep the level of debt outstanding from rising any further, it could enact new laws that alter the balance of revenue and spending.
Separately, Congress has also set a limit on the total size of the federal debt. This is what is known as the debt ceiling. By statute, it limits the amount of debt outstanding at any point in time. If the debt level has reached the ceiling, the Treasury department cannot issue additional debt. This has led to a conflict, because it means that Congress has 1) enacted laws governing spending and taxation that require the government to issue new debt to make up the difference between the two, and 2) enacted a law that forbids the government from issuing the new debt. For this reason, many economists think that Congress should end the practice of setting a debt ceiling.
2) The debt ceiling is consistently being adjusted to a higher level. Why is that?
GCR: With the exception of the fiscal years 1998-2001 at the end of the Clinton administration, the government has run a budget deficit every year since 1970. Since [the government] must issue new debt to finance the deficits, the federal debt has grown.
3) Where are American tax payer dollars going?
GCR: The federal government finances a huge array of programs, from highway construction to basic medical research. However, retirement security programs and national defense constitute the largest categories of spending, together accounting for more than half of all federal spending.
4) In your opinion, what is it going to take to get a budget passed in Washington? And given your experience on the White House Council of Economic Advisors, what budget recommendations do you have?
GCR: The obstacle to passing a budget at the moment seems to have little to do with the budget per se, but rather from a Republican attempt to stall the implementation of "Obamacare." In fact, the budget deficit is on a perfectly sustainable path for the next few years. In an ideal world, Congress would increase spending even more in the near term to provide additional support to the economy, while pairing it with policies that would reduce the deficit in the medium term. On the spending side, these could include strengthening of provisions in the Affordable Care Act that restrain health care spending. On the revenue side, Congress could enact a phased-in tax on carbon.