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What is the debt ceiling?

Here's what the government is banging its head against now.

By Rich_Maloof Jan 15, 2013 8:56PM

Americans have received more than a few lessons in economics since the fiscal crisis came crashing down in 2008.  Simply to follow the terminology in headlines — subprime mortgage, deregulation, fiscal cliff — takes some patient learning about finance and government. With the cliff temporarily averted, government is now banging its head on the debt ceiling. So what’s it all about?

Photo: Paul Giamou/Getty ImagesSay you need to pay for something you don’t currently have the cash for, like a high utility bill or an unforeseen dental procedure. You can put those expenses on a credit card and pay them back later. Your income normally covers your monthly budget, but sometimes things come up and you have to put it on the card. However, the credit-card company will limit how much you can borrow.

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You might be pretty careful with your own budget, but the federal government spends more than it takes in all the time. The U.S. Treasury holds the purse strings, so when the government needs more money, it asks the Treasury.

Just like a credit-card company sets a limit on how much you can borrow, there’s a law that sets a limit on how much the government can borrow. That limit is the debt ceiling.

So, the debt ceiling is the cap on how much debt the U.S. government is allowed to rack up. We can’t simply stop spending cold turkey because we have important things to pay for. In fact, the debt ceiling was first set in 1917 when we needed to fund World War I. The ceiling at that time was set for $11.5 billion. Today, the debt ceiling is $16 trillion.

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The screwy thing is that Congress is in control of authorizing increases to the debt ceiling. The Treasury lends the money, but the Treasury has to get permission from Congress to increase our country’s debt. Meanwhile, it’s Congress that decides what we spend our money on. In other words, Congress is in charge of setting a credit limit to pay for things that Congress itself has already bought.

To prevent the chaos that would destabilize global financial system, choke off critical spending, and force the U.S. into default on foreign loans, the government must (1) raise the debt ceiling; or (2) balance the budget (i.e., stop spending more than it takes in); or (3) pay off the national debt. Don’t hold your breath for options 2 and 3 — the U.S. has only been debt-free once in its history, and only for one year, after President Andrew Jackson oversaw the paying off of the national debt in 1835.

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