With Congress set to reconvene this Wednesday, the first major task of the 112th Congress will regard the debt ceiling. The federal debt ceiling is a statutory mechanism first enacted in 1917 to limit the total debt of the federal government. Total debt is measured with the sum of two factors. First, the amount of public debt, which is $9.3 trillion as of November 30th, according to the latest statistics [.pdf] from the US Treasury. Second, the amount of obligated government expenses, which is $4.6 trillion. These two factors bring the total amount of debt to $13.9 trillion as of November 30th.
Congress typically sets the debt ceiling each year and on occasion more than once a year. In February 2010, Congress set the debt ceiling at $14.3 trillion. As a result, total debt is $400 billion away from its limit and is quickly approaching the breaking point. In November alone, the federal deficit totaled $150 billion. At this pace of spending, the debt ceiling would be reached in mid February. This impending collision is why the 112th Congress must address the debt ceiling in the near future.
Despite congressional Republicans who have said they do not plan to approve a higher debt ceiling in 2011, such as Michele Bachmann and Mike Kelly during interviews yesterday on the CBS program Face the Nation, there is a high likelihood for the 112th Congress to increase the debt ceiling. Congress has increased the debt ceiling for six consecutive years. Since 1940, Congress has raised the debt ceiling 79 times. Additionally, a failure to increase the ceiling would result with the government defaulting on its obligations. In other words, there would not be any funding for government operations, including Congress itself.
However, if Congress does not raise the debt ceiling by mid February, the government would not completely shutdown, but simply operate on IOUs. This is exactly what occurred in 1996, as well as 2002, when Congress similarly hesitated to increase the ceiling. The Treasury Secretary has the authority to approve this tactic and Timothy Geithner would likely utilize IOUs while Congress debates the issue.
Still, according to to the Chair of the White House Council of Economic Advisers Austan Goolsbee, hitting the debt ceiling is “totally unprecedented in American history and the impact on the economy would be catastrophic – far worse than the economic crisis in 2008.” Goolsbee argues an increase in the debt ceiling must eventually occur to prevent an economic disaster.
Facing this potential disaster, other congressional Republicans, such as Republican Senator Lindsey Graham in an interview yesterday on the NBC program Meet the Press, said he is reluctant to raise the debt ceiling unless Social Security or other entitlement programs are reformed. Therefore, it appears Republicans are willing to vote for an increase in the debt ceiling, but not without a compromise.
Lastly, the debt ceiling has been used as a compromising issue in the past and 2011 is not different. Considering the historical record to increase the ceiling, the only remaining question is whether Congress will reach a compromise before the government resorts to IOUs.