Debt Ceiling Dilemma: Evaluating its Necessity, Economic Impact, and Solutions

The debt ceiling is a recurring debate every year and has been for decades. This brief will explore this debate in terms of the history behind it, the policy surrounding it, and the conclusions we can draw. The goal is to understand the nature of the debt ceiling as well as the various consequences that can result from the various solutions.

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June 24, 2023

At YIP, nuanced policy briefs emerge from the collaboration of six diverse, nonpartisan students.

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The debt ceiling was set in the mid 20th century and has been raised countless times since. The deadline to raise the debt ceiling is June 5th, meaning congress can move to increase it by then and if it doesn’t they will have to default on any leftover debt. Given the deadline being right around the corner and the government being undecided, it’s important to reveal what is possibly in store for the nation's economy. 

Pointed Summary

  • Debt ceiling deals
  • Collapse of financial infrastructure   
  • Increasing inflation 


Reaching the debt ceiling seems to have an inherently obvious outcome, but there are many reasons the debate occurs at all. The most popular position is that we should certainly raise the debt ceiling and do everything possible to avoid a default. A default is speculated to cause an entire collapse of the financial market due to the trillions of dollars globally that rely on trust in the American government to repay their debts. Former Secretary of the Treasury, Jacob Lew, said, “I think it’s pretty safe to say that if we were to default, it makes the odds of a recession almost certain.” This implies that millions of jobs would be at risk if the government allows a default to occur. Given this, it’s easy to see why the debt ceiling has been raised many times, however, there are other perspectives.

The other position concedes that a default would have immediate economic repercussions, however they don’t believe in raising it due to the precedent it sets and the long term consequences. The debt ceiling has been raising ever since it was set in 1962, and especially in recent years it’s been raised to accommodate aggressively high spending. This spending is a major player in constantly rising inflation. And the belief is that we need to make a stand now to limit the debt ceiling and make spending cuts, despite any immediate consequences for the long term health of the economy. Otherwise the economy will continue to go through an inflationary boom, inevitably leading to a bust. This gives insight as to why the debate exists in the first place compared to the government blindly following one side. 


A. Current Stances

Since its establishment in 1939, the modern US debt ceiling has been routinely raised by Congress regardless of its political composition to help the nation fulfill its spending obligations. This process became more contentious in the 1970s as Americans experienced the Vietnam War, successive economic shocks, and the emergence of new partisan ideologies. Simultaneously, the war, Great Society programs, and rising inflation necessitated massive increases in government expenditures that set the stage for tenser fiscal debates. [1]

These days, debt ceiling votes are opportune political leverage points for both sides of the aisle. The ultimate raising of the debt ceiling is typically seen as non-negotiable, though lawmakers often seize the opportunity to attach partisan riders and provisions. Republicans, emboldened by their current majority in the House of Representatives, stonewalled any debt ceiling increase without any spending cuts and new work requirements at the start of 2023. The initial reaction from Democrats was equally determined, with President Biden threatening to veto a Republican debt-ceiling bill introduced by Speaker Kevin McCarthy in April. [2] As the impasse became increasingly untenable, negotiations between the White House and Republican House Leadership progressed to produce a bipartisan agreement in May. The patchwork of legislative provisions entailed by the agreement reflects the attitude of compromise needed for effective policy making in today’s divided government. While Democrats obtained their desired suspension of the debt ceiling through January 2025, they conceded to increased work requirements for recipients of food stamps, limits on discretionary spending, and other Republican policy priorities.[3] In truth, both parties have historically contributed to the growing national debt, but Republicans have adopted the visage of wanting to rein in federal spending on a small-government party platform. [4] Plenty of moderates and Democrats share similar concerns over the unrestrained growth of government debt, but any attempt to block a clean debt ceiling increase is seen as merely worsening the US’ reputation as a reliable borrower and would not outweigh the deep economic costs of defaulting. 

B. Tried Policy

In previous crises, policy measures have successfully warded off default often with bipartisan compromises being made. During the debt crisis of 1995, default was averted when Republicans and Democrats agreed on the Clinton administration’s budget and also passed a measure to raise the debt ceiling. In 2011, during Obama’s first year in office, the debate over raising the debt ceiling versus reducing government spending led to a debt crisis that resulted in the Budget Control Act of 2011. While this act was a compromise that raised the debt ceiling up to $2.4 trillion and capped the amount of discretionary spending to save $900 billion over ten years, Standard and Poor’s, an international credit rating agency,  still decreased the United States’ long-term credit rating from AAA to AA+. Policymakers fear the looming effects that another downgrade could bring, including higher borrowing rates for consumers, economic stability and decreased investment. 

Policy Problem

A. Stakeholders

The outcome of the current debate on the debt ceiling will have unequivocally wide-reaching impacts on Americans, institutions, and even foreign nations. Lenders of all sectors of society who own US Treasury securities would be the first to suffer the effects of a binding debt ceiling. The total national debt of $31.41 trillion can be divided into intragovernmental holdings and public debt owned by retail investors, institutions, and foreign governments like Japan and China. Intragovernmental holdings are debts that the Treasury owes to other federal agencies when agencies take in more revenue than they need and therefore use the excess to invest in Treasury bonds. The public debt– which is presently at $24.61 trillion– makes up the lion’s share of the national debt and is held by foreign governments, state and local governments, financial institutions, corporations, and individual purchasers of government securities. If the Biden Administration is forced to prioritize certain debt obligations over others in the event of a default, some lenders will certainly be affected when they cannot collect on their share of the federal government’s debt.

Apart from lenders, the national debt greatly affects average Americans as well as the 2.5 million civilian employees of the federal government, some of whom will most certainly have their paychecks delayed by a failure to lift the debt ceiling. While the harrowing consequences of a default will be discussed shortly, the national debt’s prevailing effects on the average taxpayer even without the ongoing political gridlock must be addressed. It is no secret that the national debt has grown rapidly from a debt-to-GDP ratio of 40% in 1970 to 120% in 2023. As the national debt continues to grow, some have raised the concern that the rising costs of servicing the debt will constrain the federal government’s ability to invest in key policy areas like education, healthcare, and scientific research. Interest payments on the debt make up 6.8% of the current federal budget, already totaling more than the costs of education, scientific research, agriculture, foreign aid, disaster relief, and environmental protection programs combined.

B. Risks of Indifference

Before the government reaches its “X-date”, the day when the government officially runs out of money to pay obligations that are due, there are several possibilities for how the current crisis might play out. If Congress is unable to pass a resolution to lift the debt ceiling, the Treasury Department has undertaken “extraordinary measures” since January to ensure that debt obligations can be serviced for as long as possible. These measures include suspending investments in federally-managed retirement funds and redeeming existing investments to raise as much cash as possible to honor upcoming interest payments. The measures would not avoid a default; rather, they would buy Congress as much time as possible to reach a political compromise to lift the debt ceiling. The X-date marks the day when the Treasury exhausts its extraordinary measures, and a default is officially realized.

A default on the US national debt would be unprecedented. While the government has come close several times in history, Congress has always raised the debt ceiling before time ran out. Treasury securities are traditionally recognized as the safest financial asset in the world, backed by trust in the long-term stability of the US government and its institutions. Therefore, the immediate aftermath of a default would see the US’ creditworthiness downgraded and financial panic ensue. A worsened US credit rating due to a default will create turmoil in financial markets. If the government, like a household borrower in arrears, cannot pay to service its own debt, public trust in the stability of Treasury bonds will be seriously undermined. The government has traditionally enjoyed low-interest rates on its bonds due to its reputation as a reliable borrower, but that may change in the aftermath of a default at great cost to the taxpayer. This increase in borrowing costs will be reflected in Treasury bond yields, which are the yearly payments the government has to make to bondholders that will have to be increased to compensate for the increased risk in Treasury securities. Treasury bond yields serve as a benchmark for the global financial system. For instance, mortgage lenders look to Treasury yields for guidance on setting the interest rates they charge homebuyers. Additionally, American households and businesses that depend directly on the government for wages, contract payments, or direct transfer payments will experience indefinite delays in receiving payments. The consequences of lost income and the disruptions to the financial operations of households and businesses could worsen the already recessionary economic outlook for the US economy in 2023.

A default will also impact the strength of the US dollar: presently the world’s primary reserve currency of choice. While the dollar would not fully collapse, it would certainly diminish its present dominance. Just as lenders around the world look to US Treasury yields for guidance on setting consumer interest rates, people and institutions all over the world put their trust in the American dollar as a reliable store of value due to the US’ historical stability in economic policy. The trust is well-earned, as the US has traditionally always paid its debts. But in the event of an unprecedented default, demand for US Treasury securities would drop as creditors would no longer want to risk lending to a government that may simply choose not to pay its bills. If demand for Treasury securities drops, so would demand for US dollars in foreign exchange markets to buy said securities. The dozens of countries currently holding their reserves in US dollars may seek alternatives like the Euro or the Renminbi to insulate themselves from fiscal turmoil on Capitol Hill. In sum, the financial impacts of a default on US debt would be a destabilizing force across the world and would severely undermine the US’ standing in world economic affairs. 

C. Nonpartisan Reasoning

While both Republicans and Democrats recognize the dangerous consequences of a default, some Republicans feel that it might be a necessary evil to convince the nation of its need to pursue greater fiscal austerity and change course on its skyrocketing debt. It is worth noting that true fiscal austerity to whittle down the national debt requires both spending cuts and higher taxes, the latter of which Republicans do not advocate for. Additionally, an argument is also made that an intentional default runs contrary to the general ethos that America is a reliable nation that pays its debts. Democrats desire a “clean” lifting of the debt ceiling with no strings attached and have argued that the debt ceiling is not a limit on how much the government can spend, but rather a mechanism that “allows the government to finance existing” obligations already authorized by Congress. At the end of the day, while a bipartisan majority of lawmakers believe that the costs of a default outweigh any conceivable benefits, it is left to be seen if the divided government can overcome polarity and compromise before it is too late. 

Policy Options

Though the United States came close to reaching its debt ceiling in 2011, policymakers agreed to raise the threshold right before default was imminent. For decades, the US has managed to closely avoid default, even while the risk remained high, but the potential consequences of a debt ceiling would wreak havoc on aspects of financial markets from plummeting stock prices to any American with a 401k. 

However, because the United States has never been in such a situation, the urgent policy measures that would be implemented are theoretical, and products of speculation. 

To avoid a debt ceiling, Congress can pass a Discharge Petition, which would force a committee to vote on any bills that could help resolve the crisis or potentially raise the debt ceiling to push off the default date. For this to happen, the bill would have to be in the committee for at least 30 legislative days, which equates to about two or three months, and after that, if it gets at least 218 signatures, there must be seven days before a vote can take place to send the measure into effect. 

A payment prioritization plan could avoid default in a more timely manner, though the issue here is that lawmakers would have to choose to stop funding specific programs that are deemed less important, even if their impact is still widespread. Republicans recently proposed this initiative, which prioritizes social security and publicly owned debt (bondholders). Concerns include that this method deviates from the Treasury’s traditional automated payment plan and that there is a level of partisanship and subjectivity in deciding which programs get funding and which ones get cut. 

At default or right before the limit is reached, there are a handful of extraordinary measures that the Treasury can take to still pay its bills. This does not necessarily reduce the risk of default or ward off future economic instability but ensures that for a finite period of time, Americans would have access to benefits. 

The Thrift Savings Plan Government Securities Investment Fund (G FUND) is invested daily in non-marketable, short-term securities, but in a dire situation, the Treasury can not re-invest the fund and use it to pay off bills. After the G-FUND is depleted, the Treasury can tap into the Exchange Stabilization Fund (ESF), which is normally used to sustain the value of the US dollar. A third extraordinary measure involving the Civil Service Retirement and Disability Fund (CSRDF) can also be implemented. 

In the case that the United State defaults on the debt, the resulting policy measures would focus on economic stabilization. The nation, and the world, would most likely fall into a recession, so policymakers would prioritize expansionary fiscal policies such as increased unemployment benefits and potential tax cuts. 

While the frequent and repetitive cycle of reaching and raising the debt ceiling has started to seem autonomous to the American public, it is essential to understand the severe and widespread impact of a failure to reach a compromise. Furthermore, the idea behind having a debt ceiling is that it forces Congress to each time reevaluate how money is being allocated and potentially make cuts in inefficient areas and engage in bipartisanship to come to work towards a balanced budget. However, America’s last budget surplus was in the early 2000s and the accumulation of 31 trillion dollars of debt in the following two decades has certainly casted doubt that the US will have a balanced budget anytime soon. Therefore, the uncertainty and danger that comes with the very present threat of a default has led some Americans to question the need for a debt ceiling at all if our track record shows we would just raise it again anyway. 

Given the present situation and America already tipping toward recession, both Republicans and Democrats understand the need to reach a compromise and history indicates that they will reach one before a default is reached. In order to preserve the economic stability of not only the US, but the whole world, as well as maintain the strength of the dollar and the trust in buying US treasury bonds, it is likely a deal will be reached. 

Please see references in the attached PDF.

Jordyn Ives

Policy Analyst

Jordyn Ives is a freshman at the university of Michigan, hoping to study policy, economics and Spanish. She plans on pursuing law school and working in the foreign service or as a human rights lawyer.

Arya Kumar

Lead Analyst, Criminal Justice Policy

Arya is a junior in high school in Northern Virginia who currently works at Youth Institute for Policy as the Economic Policy Department Head.

Donovan Zagorin

Former Director, Policy & 2022 Senior Fellow

Donovan Zagorin is a senior fellow and the Director of Policy at YIP. He is currently a high school student in California who looks to further the goal of improving discourse in politics, especially among youth. He has interests in politics, philosophy, and economics, all of which he hopes to pursue through college and the rest of his foreseeable future.