Felicity Duncan 22 July 2011 19:22
What if there's no US debt deal?
The United States is facing a critical juncture. On August 2, according to the US Treasury, the federal government will run out of money and stop paying some of its bills (no one knows which ones). If the bills that aren't paid happen to be interest payments, the US could go into (hopefully temporary) default; if they happen to be salaries and Social Security payments, a lot of people could go hungry.
To avoid all this, the country needs the legislature, Congress, to approve a measure to raise America's debt ceiling, which would enable the government to borrow enough money to cover its outgoings. However, so far, Congress is unwilling to do so. Instead, politicians in both parties are trying to use the issue to force through a range of conflicting fiscal measures, resulting in a political deadlock that risks sending America hurtling towards financial disaster.
The ceiling
The debt ceiling is unique to America, the result of certain legal strictures. Essentially, the US Constitution gives Congress (and not the executive branch) the sole power to borrow on behalf of the US government. Accordingly, for many years, Congress had to approve every individual American bond issue.
In 1917 however, a measure was passed that established the debt ceiling, an upper limit on how much the government could borrow. The executive branch could then issue government bonds without Congressional approval until it hit the ceiling, at which point Congress would have to raise the limit to permit more borrowing.
Since 1917, the debt ceiling has been raised many times - between 2001 and 2010, for example, it was raised no fewer than eight times - and the whole process is usually just rubber-stamped. This year, however, things are quite different, for a range of reasons.
The problems
The US government has a debt problem. America's public debt has ballooned in recent years, thanks to expensive wars in Iraq and Afghanistan, the expansion of Medicare benefits, bank bailouts, and an extensive fiscal stimulus programme. Today, America's total outstanding public debt of around $14tn is equal to almost 100% of GDP, putting the country at the top end of the list of indebted countries worldwide.
Many Americans are alarmed at this state of affairs, and anxious about further increases in the nation's debt burden, which makes raising the debt ceiling a political hot potato that no one wants to end up holding.
At the same time, Congress, especially the House of Representatives, is packed with newly elected fiscal conservatives who were voted in on a wave of Tea Party support. These folks were elected with a mandate to get America's fiscal house in order, and they are determined to do so. For many of them, any increase in the debt ceiling is unthinkable and they are determined to prevent a compromise measure from passing. This makes an agreement difficult.
And even among the more moderate types in Congress there are very deep divisions. Most politicians agree that the US needs to improve its fiscal management as a matter of urgency, but there are profound disagreements about how to do this. Democrats want to raise revenues (read: increase taxes, especially on the wealthy) and avoid deep cuts to social spending, while Republicans refuse to consider raising taxes and are insisting on deep cuts to Medicare and Social Security.
No one seems willing to bend, and the whole mess is further complicated by the upcoming presidential elections, with both sides trying to position themselves to take benefit from the situation.
As things stand now, a number of proposals have been floated, but so far everyone insists that no deal is on the horizon. It is, in short, a hot mess.
The consequences
So far, most observers have been relatively blasé about the whole debt ceiling issue; there is a widespread assumption that lawmakers will somehow cobble together a deal before the proverbial hits the fan. Surely, the rationale goes, America's politicians would not permit the disaster of a default. But what if the optimists are wrong? What if the political polarisation of American public life has become so profound that compromise is impossible?
The consequences of a failure to deal would be severe. In all likelihood, the Treasury would prioritise debt payments and essential services, closing down large parts of government that are considered non-essential.
Citizens in states with many government workers, like Virginia, would face serious problems, and all US states would find their ability to borrow severely constrained. If social grant payments were suspended, the pain would be even more severe.
The effects of all this on the still-fragile US economy would be disastrous, and could even tip the whole thing back into recession; recovering from even a partial, temporary default would be an uphill battle. From a more long-term perspective, a US fiscal crisis would further undermine confidence in the dollar, and would probably hasten American economic decline.
A failure to reach a deal would be a severe indictment of America's political class. If Congress cannot avert an obvious impending disaster, how will it cope with the many strategic threats America faces? It's a gloomy time in these United States.
