The "debt ceiling" is exactly what it sounds like – the maximum that the federal government is allowed to borrow. Why is there a maximum? Because Congress set one more than a century ago to curtail government borrowing. But instead of sticking to it, Congress has gone ahead and raised the limit every time it's been hit.
The arguments in favor are generally the same every time. One is that the money's already been spent – raising the debt limit just lets us keep paying back our creditors. (More on that in a second.) Another is that failing to raise the limit would cause the US to default on some of its obligations, triggering a crisis in the financial system.
The reasons against it are simpler. Outstanding public debt is about $28.7 trillion. That's a hard number to choke down, and it's getting larger every second.
People really concerned about public debt will add in the currently unfunded liabilities of Medicare and Social Security and argue total US liabilities are somewhere north of $156 trillion.
Why this matters: Treasury Secretary Janet Yellen has been warning Congress for months about the consequences of not raising the limit. The US technically reached its limit in August, when a two-year reprieve Congress passed in 2019 expired. The Treasury Department has been moving things around to cover costs since then.
If the US defaults on the debt, there would be a domino effect, said Mark Zandi, the chief economist for Moody's Analytics:
- Stock markets decline
- Mortgage rates rise
- It's going to be difficult for businesses to raise the cash that they need to fund their daily operations.
If the threat of those consequences doesn't shake lawmakers into action and they do default, the problems would only escalate. Particularly, if they didn't immediately react and a default persisted for weeks, Zandi said it would:
- Cost millions of US jobs
- Unemployment would shoot to double digits
- The stock market could lose up to a third of its value – $15 trillion.
There is a counterargument that the actual default would not be as cataclysmic as anticipated. When the country approached default in 2011, S&P downgraded the US credit rating, but the consequences were minimal since lawmakers ultimately paid the debt.