EconoMeter: Does it matter if Congress can't agree on debt ceiling?

If Congress fails to increase the debt ceiling, will that threaten the U.S. economy?

Yes 43% correct! (70)

No 57% correct! (91)

161 total votes.


This week's question: At the heart of the debate over the recent debate over shutting down the government is the question of whether Congress should raise the federal debt ceiling, to allow for more borrowing to pay for government programs. As of last week, the nation was just $80 billion shy of the $14.3 trillion debt ceiling and government officials were warning that the ceiling would be hit no later than May 16. If Congress fails to approve an increase in the debt ceiling, would that pose a significant threat to the U.S. economy?

Gary London

Gary London, The London Group

Answer: Yes

While there is a lot of positioning going on between the Republican house and the White House, I’m inclined to believe Treasury Secretary Geitner who suggests that failure to raise the debt limit would precipitate a default by the United States with all kinds of dire consequences. Knowing what is at stake (including that the nation would not be able to borrow to meet its obligations, the Treasury’s default would raise all borrowing costs, and many other issues). Things are not what they appear. This is a Republican effort to winnow through higher spending cuts or to balance the budget. Mostly I am OK with that. So I will look away from the fictional idea that the debt ceiling wouldn’t be raised, and choose to look to what is really going on. It’s a good ole poker game. The end result will be more spending cuts, increase in the debt ceiling, and a lot of political rhetoric leading to the next presidential election on who can take credit for saving the world. That is not a bad result.

James Hamilton

James Hamilton, University of California San Diego

Answer: Yes

Once you have committed to particular levels for taxing and spending, the amount you have to borrow is necessarily determined. The fundamental problem is that Congress has authorized spending in excess of revenues. If it then refuses to authorize borrowing, there must be a default on some obligations. There will be no immediate problems of missing the supposed deadline, because there are some temporary accounting maneuvers the government can use to continue to pay its bills. But if it is allowed to get to a point where the Treasury’s ability to pay interest and principal owed to existing creditors comes to be called into question, it would be a chaotic event for world financial markets and incredibly costly for U.S. taxpayers.

Kelly Cunningham

Kelly Cunningham, National University System

Answer: Yes

However, the greater threat to the U.S. economy is continuing to unabashedly spend the nation into effective bankruptcy with perpetually increasing debt. Raising the debt ceiling only postpones the inevitable crash. Spending non-existent money in an attempt to direct the economy is leading to collapse just as every Ponzi scheme eventually fails. A ceiling on debt will eventually be imposed by America’s creditors. Expanding the money supply like any other banana republic is the worst case scenario, yet that is what the Fed is calling “quantitative easing” and allowing Congress to drive the economy over the financial cliff.


