You may have heard about a little thing called the debt ceiling...
What is the national debt?
Article I Section 8 of the United States Constitution gives Congress the power to borrow money on the credit of the United States in order to pay for the deficit the cost of its operations that aren't covered by what it makes in taxes. The government borrows this money from a gamut of institutions and individuals, from the Federal Reserve to other governments to individual bondholders to state governments.
Government spending currently outpaces tax revenues by about $118 billion a month. The total debt is the cumulative buildup of this deficit. [Read: How Much Is the U.S. National Debt? ]
What is the debt ceiling?
Until 1917, Congress authorized each and every debt issuance separately. Then, in that year, Congress passed the Second Liberty Bond Act to provide more flexibility in financing the United States' involvement in World War I. One clause of the act established a limit, or "ceiling," on the total amount of bonds that could be issued. At that time the ceiling stood at $11.5 billion.
The modern debt ceiling, in which an aggregate limit is applied to nearly all federal debt, was established by Public Debt Acts passed in 1939 and 1941. With these acts, Congress authorized the Treasury to issue such debt as was needed to fund government operations (as authorized by each federal budget) as long as the total debt does not exceed a stated ceiling. Since 1979, the House of Representatives by rule has automatically raised the debt ceiling when passing a budget, except when the House votes to waive or repeal this rule.
How high is the debt ceiling right now, and why does it need to be raised?
Currently, the debt ceiling stands at $14.294 trillion. It was raised to that limit on February 12, 2010, and the country's actual accrued debt hit that mark on the morning of May 16. By taking various measures such as suspending investments in federal retirement funds, the Treasury Dept. was able to bring down the debt enough to allow the government to continue borrowing until Aug. 2. If lawmakers don't raise the ceiling by then, the government will default: It won't be able to pay its bills. [Infographic: Visualizing the National Debt ]
How many times has the debt ceiling been raised?
Every since 1979, lawmakers have tacitly agreed to raise the debt ceiling every time they vote for either an increase in spending or a tax cut. When these measures occur, the debt ceiling automatically rises to contain the new debt. So, in reality, when lawmakers argue about whether to raise the debt ceiling, they are debating whether to pay the bills that they have already incurred.
Since March 1962, the debt ceiling has been raised 74 times, according to the Congressional Research Service. Ten of those times have occurred since 2001.
Why does there need to be a debt ceiling at all?
In theory, the debt ceiling exists to help lawmakers control spending by forcing them to take stock of the country's fiscal situation each time they need to raise it. However, because the decision about how high to raise the debt ceiling is made after lawmakers have already passed spending hikes and/or tax cuts, it doesn't do much in practice to encourage fiscal responsibility.
According to CNN Money, some budget experts think it would be better to tie the debt limit decision directly to lawmakers' legislative actions.
Why is the debt so large?
In 2001 and 2003 George W. Bush signed tax bills into law that lowered the top marginal income tax rate from 39.6 percent to 35 percent, and cut the top capital gains tax rate from 20 percent to 15 percent. As a result, the percentage of Americans' income that they pay in taxes is at its lowest level since 1950, according to USA Today. [Read: Which 10 Giant Corporations Don't Pay Taxes? ]
The Bush tax cuts coincided with two huge new expenses: the wars in Afghanistan and Iraq. Together, slashed revenue and increased spending sent the national debt skyrocketing. Meanwhile, the cost of healthcare soared, too: The amount that the US government spent annually on Medicare increased by 137 percent from 1999 to 2009.
Government spending shot up further in the wake of the financial crisis of 2008, when bailout and stimulus bills were passed in an effort to rescue and reinvigorate the economy. Meanwhile, tax revenues slumped due to the recession. With less revenue and more expenses, the deficit and thus the national debt grew.
Will the debt ceiling ever be lowered?
The debt ceiling could be lowered if government spending decreased or if taxes increased to the point that the government was able to pay down some of its debt. If tax revenue overtook spending, there would be a "budget surplus," which could go toward paying back creditors. With a lower total debt, the ceiling could theoretically be lowered.
What will happen if the debt ceiling doesn't get raised before Aug. 2?
The economy is so complex that it is impossible to know exactly what will happen if lawmakers fail to raise the debt ceiling in time. The immediate consequence will be that the Treasury won't be able to pay all the country's bills. "If Congress failed to increase the debt limit, a broad range of government payments would have to be stopped, limited or delayed, including military salaries and retirement benefits, Social Security and Medicare payments, interest on the debt, unemployment benefits and tax refunds," Treasury Secretary Timothy Geithner wrote in his April 4 letter to Congress.
Ultimately, lawmakers will have two choices about what to do if they're unable to borrow more money. They could either cut spending or raise taxes by several hundred billion dollars just to get through Sept. 30 the end of the fiscal year. Or they could do neither, and the United States could default on some of its obligations.
As CNN put it, "the first option would be impossible to execute without serious economic repercussions. And the second option could cripple the economy and send world markets into a tailspin." Furthermore, the U.S. dollar would almost certainly decline in value.