U.S. government spending caused government debt to hit the debt ceiling, again. It’s a story we’ve all heard before. The U.S. government technically ran out of money to fulfill its obligations in late January, forcing the treasury to take drastic measures to avoid defaulting on its debt. Under a unified Congress the debt ceiling would ordinarily be lifted without question, but in a divided Congress there is a risk of not lifting the debt ceiling and by extension we must seriously consider the potential of default. The last time we came this close to the debt ceiling, the government’s debt rating was downgraded from AAA to AA+. With economists warning of major problems in U.S. markets if the debt ceiling is not raised, some observers question why we have a debt ceiling in the first place.
Opponents of the debt ceiling make a fair argument. The debt ceiling has mostly failed to force fiscal discipline on an irresponsible Congress, and worse, the economic fallout of a default on U.S. government debt would be intense. After all, what do we do when risk-free treasury securities suddenly carry risk? A failure to raise the debt ceiling would require a reassessment of financial thinking, but few experts actually expect to see a failure to raise the debt ceiling. Seeing the debt ceiling increase as a foregone conclusion, opponents of the debt ceiling advocate for removing the limit altogether.
However, the debt ceiling serves an important purpose. It forces everyone, from the average American to the policy-making insider to have a serious conversation about our national spending, and to benchmark changes in government attitudes toward spending. While it may not directly force fiscal discipline on Congress, it serves as an essential check-up on the rate of U.S. government borrowing. Though it may appear as an opportunity for partisan brinkmanship, the debt ceiling requires the Congress to reconsider their spending plans given the existing national debt.
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