Another big battle is to brew over US debt caps. This is the statutory limit on the amount that the government can borrow to pay an invoice. In an interview, Senate Minority Leader Mitch McConnell Republicans said they disagree Raise the debt cap in a “freedom for this tax and spending” environment.Meeting Suspended debt cap Two years until July 31, 2021 in 2019.

US Treasury You can take emergency measures It allows it to continue borrowing until late November without increasing the limit.But if the cap isn’t raised by then, the US will face either a total spending cut or an unprecedented default outlook-potentially. Disastrous economic impact..economist Steve Pressman Explain why we have a ceiling, and why he thinks it’s time to abolish it.

1. What is the debt cap?

Like our other people, the government has to borrow when spending more money than it receives. They do so by issuing bonds. It is effectively an IOU, promising to repay money and pay interest on a regular basis. Government debt This is the sum of all the borrowed money.

The· Debt cap,this Parliament was established A century ago, it was the largest amount the government could borrow. It’s a national debt limit.

2. How much is the country’s debt?

Currently US Government Debt $ 28.5 trillion, About 29% more Value of all goods and services It will be produced in the US economy this year.

About a quarter of this money is actually borrowed by the government. The Social Security Administration accumulates surplus, invests extra money, Currently $ 2.9 trillion, With government bonds.Federal Reserve System Hold over $ 5 trillion With US Treasuries.

The rest is public debt. As of May 2021 Foreign, business, individual He owned $ 7.14 trillion in US government debt. Japan and China are the largest holdings, each exceeding $ 1 trillion. The rest rests with US citizens and businesses, as well as state and local governments.

3. Why are there borrowing restrictions?

Prior to 1917, Parliament allowed the government to borrow a certain amount of money for a certain period of time. When the loan was repaid, the government couldn’t borrow it again unless it was allowed to do so.

The Second Liberty Bond Act of 1917, Created a debt cap, I changed this. It allowed continuous rollover of debt without Congressional approval.

Congress enacted this measure, allowing then-President Woodrow Wilson to spend what he thought was needed to fight World War I, without waiting for the actions of members who were often absent. But Congress didn’t want to write a blank check to the president, so he limited borrowing to $ 11.5 billion and needed a law to increase it further.

Debt cap Has increased dozens of times Since then, it has been interrupted several times.The last change happened in August 2019, When Congress suspends restrictions Until July 31, 2021..

The new cap, which will come into effect on August 1, will be outstanding debt at the end of July 31-approximately $ 28.6 trillion.

4. What happens when the US reaches the cap?

The US government generally spends more than it takes- An additional $ 3.1 trillion in 2020.. Once you reach your debt limit, you can’t borrow to make up for the difference. The government can only use cash and tax revenue on hand.

After that, Treasury Secretary Janet Yellen said, “Special measures“Save cash. One such measure is Temporarily do not fund retirement programs For civil servants. When the ceiling goes up, The government will make up for the difference..

To Yellen’s favor is that the Treasury should have $ 450 billion in cash on hand at the end of July, Should last for about a month. In September, estimated tax payments from businesses and individuals will be paid to the Treasury. Then in October things get harder.

If the debt cap is not raised before the Treasury runs out of that option, it must decide who will be paid on the daily tax receipt. Civil servants or contractors may not be paid in full. Loans to SMEs and college students may be suspended.

It’s technically the default when the government can’t pay all the invoices. Some experts Government defaults claim to have dire economic consequences-rising interest rates, panicked markets, and perhaps a recession.

Such fears appear to be exaggerated, primarily as Congress and the President act normally when the market begins to panic.this That’s exactly what happened In 2013, Republicans tried to use debt caps to reimburse affordable care laws.

But Americans are no longer living in normal political times.Major political parties More polarized than ever..

5. Is there a better way?

United States Some countries with debt caps.. Other governments are operating effectively without it. So was America.

In my opinion, having a debt cap is dysfunctional. It will be difficult for the Treasury to pay the invoice when it is due.

The best solution is to completely dispose of the ceiling. Congress has already approved spending and tax laws that require more debt. No additional borrowing needs to be approved.

It’s important to remember that the initial debt cap was set because Congress couldn’t meet immediately and approved the spending needed to fight the war. In 1917, the cross-country trip took place by rail and took several days to reach Washington. At that time, this makes some sense. Today, when Congress can vote online from home, it can’t vote at all.

This is an updated version of First published article July 18, 2019.

Author: Steven Pressman-Professor Emeritus of Economics, Monmouth University