As I’m reading various news sites over lunch, I’m seeing article after article about the next fiscal problem — the debt ceiling. Every time this comes up I realize that many people don’t understand what the real issues are here. Here’s a little primer to help. Note that throughout this discussion I’m not going to talk about what the government spends money on; I’m just going to presume it is spending it on something. We can argue the what later. I’ll note that much of this was learned by listening to NPR’s excellent Planet Money podcast. I’ll link where I can.
The government spends money through the appropriation process. In this process, Congress dictates how much money each Federal agency can spend over the next fiscal year (October 1 to September 30). Once the appropriation bills are signed, the agencies can spend the money. They don’t have to wait for the income to be received from taxpayers.
The budget for any year may run a surplus or deficit. This reflects whether the anticipated income is sufficient to cover all the money appropriated. If the anticipated income is not sufficient, the budget is running a deficit and money must be borrowed to cover authorized expenditures. If there is a surplus, this means that there is extra money that can be used as Congress sees fit — extra appropriations, paying down the debt, etc.
The Federal debt is what the government owes to those who have lent it money. How does the government lend money? Via government bonds, which are one of the safest investments around. These are instruments such as savings bonds and T-bills. Do you have savings bonds? Then you own government debt. Do you have investments, such as 401(K)s or pensions? Do you have savings accounts? Those put their money in T-bills because they are safe. This is one reason you do not want the Federal debt to go to nothing. There would be no safe investment for you to put your money in. If the Federal debt went to zero, there would be no savings bonds or treasury notes — which would be disastrous for the economy.
There’s another reason you don’t want the Federal debt to go to zero. Credit-worthiness. Economic markets prefer if there is some manageable level of debt; you get better interest rates that way. So the goal in paying down the debt should be not to eliminate it, but to bring it to a manageable level. There has 0nly been one time in the country’s history when we haven’t had a debt — during Andrew Jackson’s presidency — and it was disastrous for the economy (see here and here on Planet Money).
So what is the debt ceiling? There’s a simple answer: Congress has authorized spending money, but it doesn’t always have that money to spend. This could be because tax receipts haven’t arrived yet, or more likely, Congress authorized spending money with a known deficit. In the early days of the US, the Treasury had to come to Congress for each loan individually, and that became a burden for Congress (which would debate the terms and conditions for each individual loan). At some point, Congress authorized the Treasury department to create the loans without coming to Congress… up to a certain amount about of national debt. Each time that amount had to be raised to borrow money that Congress previously authorized spending, the Treasury department came back and said “Mother May I” (see here and here on Planet Money). So right now, that’s what we’re fighting about: raising the borrowing limit to cover the money that Congress previously authorized.
So, when you hear some critter on TV talking about reducing the deficit, realize they aren’t talking about reducing the national debt. They are only talking about increasing the debt at a slower rate (see, you do use calculus in real life). To reduce the national debt, you need many consecutive years of a budget surplus, with that surplus being applied to the debt in a regular manner. We all know how reliable Congress is when presented with extra money. They’re just like you and me: we always pay our bills instead of buying the new and shiny. Right?
Now for the big question: Is the debt a problem? Not necessarily. Further, the debt problem won’t be solved overnight, and may require temporary spending to get the economy moving again… which generates more revenue that can pay down the debt without slowing the economy.
I hope this helped you to understand things.