There’s been a lot of talk in the news regarding the current Debt Ceiling negotiations going on, at least here in the United States. I understand that there are a number of people that don’t understand exactly what this is or what it means, so I thought I would explain it.
Like all entities, the United States Government needs money to work. It has to pay people and buy things. Unfortunately, the United States Government usually can’t afford to buy all the things it wants, so it usually must take on some amount of debt.
Now, the obvious solution to this would be to spend less. However, the government has made commitments, both to other entities and to it’s citizens, to do certain things and it cannot break those promises, either due to legislative reasons or to political reasons. Consequently, the US Government keeps borrowing, adding to what’s called the National Debt.
The National Debt is a series of loans given to the United States by various other countries and private entities, totaling somewhere in the neighborhood of $14 trillion dollars. It’s been accruing in one form or another since the founding of the United States, when we were too broke to pay for anything. Now, like any debt, you have to pay interest on it. Because the National Debt is so titanic, we have interest payments that exceed the GDP of some countries, which we have to pay on a regular basis.
The reason that countries continue to lend to the United States is that in 222 years (The United States was technically founded in 1789 with the adoption of the Constitution, not 1776 with the Declaration of Independence), the United States has never defaulted on it’s debt. As far as the rest of the world is concerned, we have a perfect credit rating. Sure,we have some issues, but we pay our bills on time, and that’s all anyone cares about.
In the event the United States were to default on it’s debt, it would be bad. And not just the regular kind of bad. No, we’re talking about a financial apocalypse level of bad. All the worst parts of your economics textbook and Bible.
From time to time, Congress must authorize an increase in the Debt Ceiling, or the limit of how much money the government can borrow to keep functioning. We’ve already passed the normal operating point, and are now in the “danger zone”, where the Treasury is undertaking extraordinary measures to keep the Government from defaulting on the Debt.
Normally, the political party out of power would rail against raising it because it will increase the National Debt, and the party in power would vote for it because it’s necessary.
Unfortunately, because of the American political system, there’s a problem.
The Democrats, the American center-left party, control the Presidency and the Senate, but the Republicans (also known as the GOP or Grand Old Party), the American far right party, control the House of Representatives. To explain exactly what this situation is like, I’m going to use a story.
Let’s say there’s this person called America. Your name is Dem, and there’s a person standing next to America named Gop. Gop is holding a loaded gun to the side of America’s head, and is demanding that you hand over fifty puppies, or he’s going to shoot America in the head.
Like any sensible person, you hand over fifty puppies, because you don’t want to see America get shot in the head. Gop takes the puppies and America lives.
Now, a couple months later, Gop and America are at it again. I guess America is Gop’s mistress or something, I don’t really know. The difference is that this time, Gop has put all the puppies in a cage and wired it with explosives.
Gop is now demanding five hundred puppies. If Gop doesn’t get five hundred puppies, he’s going to shoot America in the head, and blow up the fifty puppies you already gave him.
Now let’s say you get all five hundred puppies and deliver them to Gop, and tell Gop that in exchange for these five hundred puppies, you would really appreciate it if Gop would hand over the detonator for the fifty puppies wired with explosives, and the gun he’s holding to the head of America.
Gop refuses. Gop now has a gun against America’s temple, the hammer is cocked, and he has fifty puppies wired with explosives, with an offer for five hundred more if he’ll just put down the gun and detonator.
The problem is that Gop can’t do that, because Teaparty, his former partner, is holding his wife, Reelection, hostage too. If Gop doesn’t get all the puppies, and keeps the gun and detonator, Teaparty is going to shoot Gop’s wife Reelection in the head.
To explain in a less obtuse manner: the Democrats have offered large amounts of cuts to the budget, but are also asking for revenue raising measures like closing tax loopholes and raising taxes on the very wealthy. Every serious economist agrees that you cannot cut your way to prosperity. You have to also raise revenues. The Republicans reject these ideas for two reasons: a far right anti-tax group has been holding them hostage over tax increases since the 80s, and an insurgency called the Tea Party (the “Tea” supposedly stands for “Taxed Enough Already”) is threatening any Republican that works with the Democrats with being targeted for defeat in the 2012 elections.
Consequently, the GOP has demanded deep and painful cuts for American social services in exchange for raising the debt ceiling. The Democrats are prepared to offer some of those cuts, in exchange for raising revenue in non-politically dangerous ways. The GOP will not raise new revenue, for any reason, because they’ll get killed by their constituents. Without new revenue, the Democrats won’t vote for cuts. Thus, an impasse.
However, there is a potential solution.
The 14th Amendment of the United States Constitution, which trumps all other laws in the United States, states “The validity of the public debt of the United States, authorized by law, […] shall not be questioned.”
Constitutional law scholars are hypothesizing that this could provide a means for the President to invalidate the entire debt ceiling as unconstitutional, as not raising it would force the US to default, or cause question, with it’s public debt.
This, of course, would cause the party out of power to absolutely flip out. However, if it were to be upheld in court, it would prevent this from happening again.
At this point, it’s academic and mostly kabuki theater. As the August 2nd deadline approaches however, it will become clearer who’s actually willing to blow up the world economy to make a point.
