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How can any government continue to operate at a financial deficit? At what point does this deficit prevent government from operating?
— Rod, Houston
In the short term, the only obstacle is the official debt ceiling, which is the statutory limit on total federal borrowing. The problem is that the debt ceiling is set by Congress — the same folks with the spending problems that created budget deficits in the first place.
This is roughly the same as letting you or me decide how big a limit we’d like on our credit cards. Before you went to the mall, you’d just call up your credit card company and tell them you’d like to raise your limit, and they'd automatically say yes. Of course, no lender in their right mind would agree to such an arrangement. (For everything else, there’s the U.S. Congress.)
There are always some members of Congress who don’t like this arrangement. From time to time, when the government is about to run out of money and needs a bigger credit limit, there are some in Congress who threaten to shut down the government as a form of protest. You can usually find them on C-SPAN speaking eloquently to an empty chamber.
Occasionally, someone in these standoffs forgets to blink and the government actually does shut down — sort of. The last time this happened, there was a partial shutdown — for six days in November 1995 and again for about three weeks beginning in December 1996.
Some 760,000 federal workers were either laid off or kept working with a promise they’d get paid later. Passports weren’t issued, visitors to national parks were turned away, and clean-up of toxic waste sites was halted. In the end, the Clinton White House and Republican Congress worked out a deal and things got back to normal.
It could happen again, but the move is so disruptive, Congress usually just raises the debt ceiling and keeps on spending. As of the end of November, the debt ceiling was $8.97 trillion, and the total national debt was about $8.55 trillion. Which means Congress has another $420 billion or so on its credit card before it gets a call from the Treasury saying it’s maxed out.
This house of cards will continue to stand as long as investors keep buying the IOUs (aka bonds) printed up by the Treasury Department and sold to investors. But if demand for those bonds slows down, the only way to sell more debt is to raise the interest rates paid out on those Treasury securities. When that happens, the higher cost of borrowing is a big drag on the economy. If it goes on for too long, you get a recession.
The problem is that this process plays out so gradually that, over the short term, it’s hard to point to the harm being caused. It’s a little like global warming: As long as there’s no immediate, dramatic impact, people figure we can go on this way forever. And as long as the U.S. economy remains strong, the borrowing is sustainable.
With the U.S. economy currently throwing off a solid flow of tax revenue, this would be a great time to get the federal budget beast under control — much the way a raise or a bonus at work is a great opportunity to pay off your credit cards. On the other hand, if we wait until the baby boomers retire, and the double-debt piles of Medicare and Social Security come due, it’s going to be a lot harder to deal with.
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