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      Republicans aren’t going to tell Americans the real cause of our $31tn debt | Robert Reich

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      Republicans aren’t going to tell Americans the real cause of our $31.4tn debtRobert ReichThe rich used to pay taxes. Now they loan money to the US government – at a profit that everyone else pays for The dire warnings of fiscal hawks are once again darkening the skies of official Washington.They’re demanding that the $31.4tn federal debt be reduced and government spending curtailed – thereby giving cover to Republican efforts to hold America hostage by refusing to raise the debt ceiling.It’s always the same when Republicans take over a chamber of Congress or the presidency. Horrors! The debt is out of control! Federal spending must be cut!When they’re in power, they rack up giant deficits, mainly by cutting taxes on corporations and the wealthy (which amount to the same thing, since wealthy investors are the major beneficiaries of corporate tax cuts).Then when Democrats take the reins, Republicans blame them for being spendthrifts.Not only is the Republican story false, but it leaves out the bigger and more important story behind today’s federal debt: the switch by America’s wealthy over the last half century from paying taxes to the government to lending the government money.This backstory needs to be told if Americans are to understand what’s really happened and what needs to be done about it. Republicans won’t tell it, so Democrats (starting with Joe Biden) must.A half century ago, American’s wealthy helped finance the federal government mainly through their tax payments.Tax rates on the wealthy were high. Under Republican president Dwight Eisenhower, they were over 90%. Even after all tax deductions, the wealthy typically paid half of their incomes in taxes.Since then – courtesy of tax cuts under Ronald Reagan, George W Bush and Donald Trump – the effective tax rate on wealthy Americans has plummeted.Not only has their income tax rate dropped but other taxes that hit them hardest, such as the corporate tax, have also declined.Even as the rich have accumulated unprecedented wealth, they are now paying a lower tax rate than middle-class Americans.Trump’s 2017 tax cut – largely a handout to the rich – helped push the tax rate on the 400 wealthiest households below the rates for almost everyone else.By 2018, the 400 wealthiest American households paid a lower total tax rate – including federal, state and local taxes – than any other income group. Their overall tax rate was only 23%. It had been 70% in 1950.Middle-class and poor families didn’t benefit from the drop in income and corporate taxes. They now pay more in payroll taxes (which finance Medicare and social security) than previously, so their overall taxes have remained fairly flat.One of the biggest reasons the federal debt has exploded is that tax cuts on corporations and wealthier Americans have reduced government revenue.In the first full year of the Trump tax cut, the federal budget deficit increased by $113bn while corporate tax receipts fell by about $90bn, which would account for nearly 80% of the deficit increase.Meanwhile, America’s wealthy have been financing America’s exploding debt by lending the federal government money, for which the government pays them interest.As the federal debt continues to mount, these interest payments are ballooning – hitting a record $475bn in the last fiscal next year (which ran through September). The Congressional Budget Office predicts that interest payments on the federal debt will reach 3.3% of the GDP by 2032 and 7.2% by 2052.The biggest recipients of these interest payments? Not foreigners but wealthy Americans who park their savings in treasury bonds held by mutual funds, hedge funds, pension funds, banks, insurance companies, personal trusts and estates.Hence the giant half-century switch: the wealthy used to pay higher taxes to the government. Now the government pays the wealthy interest on their loans to finance a swelling debt that’s been caused largely by lower taxes on the wealthy.This means that a growing portion of everyone else’s taxes are going to wealthy Americans in the form of interest payments, rather than paying for government services that everyone needs.So, the real problem isn’t America’s growing federal budget deficit. It’s the decline in tax revenue from America’s wealthy combined with growing interest payments to them.Both are worsening America’s already staggering inequalities of income and wealth.What should be done? Isn’t it obvious? Raise taxes on the wealthy.
      Robert Reich, a former US secretary of labor, is professor of public policy at the University of California, Berkeley, and the author of Saving Capitalism: For the Many, Not the Few and The Common Good. His new book, The System: Who Rigged It, How We Fix It, is out now. He is a Guardian US columnist. His newsletter is at robertreich.substack.com
      TopicsRepublicansOpinionUS politicsDemocratsUS economyEconomicscommentReuse this content More

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      India as a Driver of Global Growth | FO° Live

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      The Fair Observer website uses digital cookies so it can collect statistics on how many visitors come to the site, what content is viewed and for how long, and the general location of the computer network of the visitor. These statistics are collected and processed using the Google Analytics service. Fair Observer uses these aggregate statistics from website visits to help improve the content of the website and to provide regular reports to our current and future donors and funding organizations. The type of digital cookie information collected during your visit and any derived data cannot be used or combined with other information to personally identify you. Fair Observer does not use personal data collected from its website for advertising purposes or to market to you.As a convenience to you, Fair Observer provides buttons that link to popular social media sites, called social sharing buttons, to help you share Fair Observer content and your comments and opinions about it on these social media sites. These social sharing buttons are provided by and are part of these social media sites. They may collect and use personal data as described in their respective policies. Fair Observer does not receive personal data from your use of these social sharing buttons. It is not necessary that you use these buttons to read Fair Observer content or to share on social media. More

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      FO° Live: India as a Driver of Global Growth

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      The Fair Observer website uses digital cookies so it can collect statistics on how many visitors come to the site, what content is viewed and for how long, and the general location of the computer network of the visitor. These statistics are collected and processed using the Google Analytics service. Fair Observer uses these aggregate statistics from website visits to help improve the content of the website and to provide regular reports to our current and future donors and funding organizations. The type of digital cookie information collected during your visit and any derived data cannot be used or combined with other information to personally identify you. Fair Observer does not use personal data collected from its website for advertising purposes or to market to you.As a convenience to you, Fair Observer provides buttons that link to popular social media sites, called social sharing buttons, to help you share Fair Observer content and your comments and opinions about it on these social media sites. These social sharing buttons are provided by and are part of these social media sites. They may collect and use personal data as described in their respective policies. Fair Observer does not receive personal data from your use of these social sharing buttons. It is not necessary that you use these buttons to read Fair Observer content or to share on social media. More

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      US hits borrowing limit, kicking off fight between Republicans and Democrats – as it happened

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      The US government has hit the legal limit on how much money it can borrow, and Congress must approve an increase to avoid a debt default in the coming months, Treasury secretary Janet Yellen said this morning.In a letter to congressional leaders, Yellen announced the Treasury would begin taking “extraordinary measures” to make the government’s cash on hand last until Congress acts. These include a “debt issuance suspension period” lasting from today till 5 June, as well as suspending investments into two government employee retirement funds.“As I stated in my January 13 letter, the period of time that extraordinary measures may last is subject to considerable uncertainty, including the challenges of forecasting the payments and receipts of the US government months into the future. I respectfully urge Congress to act promptly to protect the full faith and credit of the United States,” Yellen wrote.The latest standoff over the debt ceiling kicked off today, when the US government officially hit its legal borrowing limit. The clock is now ticking for Congress to reach an agreement to raise it, otherwise the country will default for the first time in its history, perhaps as soon as June. The White House is demanding Republicans controlling the House raise the limit without conditions, but several moderate GOP lawmakers say the Biden administration needs to compromise. Separately, the supreme court released a report into the leak of its draft opinion overturning Roe v Wade, and said they could not figure out who did it.Here’s what else happened today:
      Joe Biden remains unpopular, a new poll found, but the president still reportedly plans to announce his re-election campaign soon.
      The debt ceiling gets the New Yorker treatment, for better or worse.
      The top Senate Democrat and the head of America’s largest bank both warned of the consequences of breaching the borrowing limit, while the Senate Republican leader sounded optimistic a deal would be reached.
      As eager as some in Washington may be to fight over the debt ceiling, Edward Helmore reports that the head of America’s largest bank has warned of the consequences of a protracted standoff: The US should not be “playing games” with the debt ceiling, the JP Morgan chief executive, Jamie Dimon, warned warring US political factions on Thursday as a heated row over the federal borrowing limit reached a crisis point.“We should never question the creditworthiness of the US government. That is sacrosanct and it should never happen,” Dimon said on Thursday in an interview on CNBC. “This is not something we should be playing games with at all.”​Dimon’s comments came as the US treasury department announced later Thursday it would take steps to keep paying the federal government’s bills as the US hit its $31.4tn debt limit as expected.JP Morgan chief says US should not be ‘playing games’ with debt ceilingRead moreThe White House is maintaining its no-negotiations stance on the debt ceiling, the Associated Press reports:White House principal deputy press secretary @ODalton46 on the debt limit, during her first AF1 gaggle: “Our posture on this hasn’t changed. There will be no negotiations on the debt ceiling.”— Seung Min Kim (@seungminkim) January 19, 2023
      This report could be the last word from the investigation into who leaked the draft of the Dobbs opinion to Politico.The supreme court marshal’s investigators “continue to review and process some electronic data that has been collected and a few other inquiries remain pending. To the extent that additional investigation yields new evidence or leads, the investigators will pursue them,” the report said.But to underscore that the marshal had truly pursued all leads in its investigation into what the report calls “one of the worst breaches of trust in its history”, the supreme court asked former homeland security secretary Michael Chertoff to review the investigation and see if there was anything they missed.“At this time, I cannot identify any additional useful investigative measures,” Chertoff concluded. This investigation must have made the lives of supreme court employees stressful.The report details all the ways in which about 100 employees were questioned and scrutinized, as well as how the court examined its electronic equipment for clues.The electronic leads the court pursued turned up nothing, according to the report. Analysts could not determine if the court’s systems were hacked, though “the investigators did not find any logs or IT artifacts indicating that the draft opinion was downloaded to removable media, but it is impossible to rule out,” the document states. While some of the court’s printers kept logs of who was duplicating what, others did not, or kept records that were incomplete. And there was “no relevant information” on any of the court-owned electronic devices the investigators retrieved from staff, nor on any of the personal cellphones and other gear they examined.Besides the justices, 82 people had access to either physical or electronic copies of the Dobbs opinion. The investigators conducted a total of 126 interviews with 97 people, according to the report, but these, too, were fruitless. All staff agreed to be interviewed, but the report notes no leads came from these conversations. The court also checked legal research history requests from staff, and found nothing suspicious. Finally, they asked each employee interviewed to sign and swear to an affidavit saying they didn’t disclose the opinion. All they got out of this was “a few” admissions from staff that they’d told their spouse about the opinion or vote count, and some other violations of court rules that did not reveal the leaker.“Some individuals admitted to investigators that they told their spouse or partner about the draft Dobbs opinion and the vote count, in violation of the Court’s confidentiality rules. Several personnel told investigators they had shared confidential details about their work more generally with their spouses and some indicated they thought it permissible to provide such information to their spouses. Some personnel handled the Dobbs draft in ways that deviated from their standard process for handling draft opinions,” the report said.Finally, the investigators looked into connections between the court and reporters, especially Politico, the website that published the draft, but found nothing. Nor did anything come out of a forensic examination of the draft digital opinion posted on Politico’s website, an analysis of an employee’s home printer, or fingerprint analysis of “an item relevant to the investigation.”There is one group of supreme court staff that the document makes no mention of investigators interviewing – the justices themselves.In a nutshell, here is what the supreme court’s investigation into the May leak of the draft opinion in Dobbs v. Jackson Women’s Health Organization found:.css-cumn2r{height:1em;width:1.5em;margin-right:3px;vertical-align:baseline;fill:#C70000;}At this time, based on a preponderance of the evidence standard, it is not possible to determine the identity of any individual who may have disclosed the document or how the draft opinion ended up with Politico. No one confessed to publicly disclosing the document and none of the available forensic and other evidence provided a basis for identifying any individual as the source of the document. While investigators and the Court’s IT experts cannot absolutely rule out a hack, the evidence to date reveals no suggestion of improper outside access. Investigators also cannot eliminate the possibility that the draft opinion was inadvertently or negligently disclosed – for example, by being left in a public space either inside or outside the building.The Dobbs case was so controversial because it overturned the precedent allowing abortion access nationwide established in Roe v Wade.The case is not completely closed, the report notes, saying “continued investigation and analysis may produce additional leads that could identify the source of the disclosure.”Supreme court investigators could not determine who leaked the draft opinion of conservative justices’ June ruling overturning the right to abortion established in Roe v Wade, according to a report released by the court this afternoon.A team composed of the supreme court’s marshal and her staff “has to date been unable to identify a person responsible by a preponderance of the evidence,” the report said.Follow this blog for more on this developing story.Joe Biden still plans to announce his re-election campaign relatively soon despite the investigation into classified documents found at his former private office and home in Delaware, CNN reports, quoting anonymous members of the president’s inner circle.The article asserts that the president’s inner circle sees the document case ensnaring Biden as little more than “DC noise” from members of the elite within the nation’s capital. Biden, therefore, intends to stick to a timeline that would see him make a re-election announcement sometime after his state of the union speech scheduled for 7 February, the article adds. Supporters of Biden’s Oval Office predecessor Donald Trump – who is running for the White House again in 2024 – have hoped that the documents case undermines the president’s re-election chances. But Biden and his fellow Democrats argue that there are differences between the president’s case and the one involving government secrets found at Trump’s Mar-a-Lago resort in Florida.An FBI search of Mar-a-Lago last year uncovered more than 11,000 documents, including about 300 marked classified or top secret, from Trump’s time as president. Meanwhile, the documents involved in Biden’s case reportedly number fewer than 12 and date back to his time as Barack Obama’s vice-president.The US “will pay the price” if it stops paying off debts now that the nation has hit the legal limit on how much money it can borrow, the Democratic Senate majority leader Chuck Schumer has said. Schumer’s statement backed up the Joe Biden White House’s demands that Republicans controlling the US House agree to raise the country’s so-called debt ceiling without conditions, though several GOP lawmakers have said the president’s staff must be willing to compromise. “This is not complicated: if the Maga GOP stops paying our nation’s bills, Americans will be the ones to pay the price,” Schumer’s statement Thursday argued. “Political brinkmanship with the debt limit would be a massive hit to local economies, American families and would be nothing less than an economic crisis at the hands of the Republicans.”The statement continued, “From rising home costs, interest rates, cuts to social security, Medicare and more, it’s clear who will actually pay the price for gratuitous partisan politics: American families.”For the US to avoid a debt default in the coming months, both chambers of Congress must approve an increase to the limit on how much money the federal government can borrow, Treasury secretary Janet Yellen has said. Democrats hold a slim majority in the Senate, and the same is true of Republicans in the House, setting up a fight over the issue between the two parties.So it begins. The US government has hit its legal borrowing limit, and the clock is now ticking for Congress to reach an agreement to raise it, or for the country to default for the first time in its history, sometime in the coming months. The White House is demanding Republicans controlling the House agree to raise the debt ceiling without conditions, but several moderate GOP lawmakers say the Biden administration needs to compromise at the bargaining table. Meanwhile, top Senate Republican Mitch McConnell thinks everyone needs to chill out.Here’s what else has happened today so far:
      Joe Biden is still pretty unpopular, a new poll finds.
      Donald Trump plans to speak in response to comments that his latest presidential campaign just doesn’t have that 2016 vigor.
      The debt ceiling gets the New Yorker treatment, for better or worse.
      There are many factors dragging down Joe Biden’s popularity, and the recent discovery of classified documents in his possession has probably not helped matters.The president is now facing a scandal similar to the one that Donald Trump was caught up in starting in August of last year, but there are importance differences between the two men’s situations. Here’s a breakdown:Two presidents, many classified documents.Joe Biden remains an unpopular president, a Reuters/Ipsos poll released today finds, though voters don’t seem to like other Washington power players much either.Biden’s approval rating was 40% in the poll conducted over three days till Sunday, just a smidgen higher than the 39% reported a month ago and remaining near the lowest level ever recorded of his presidency.However, Republican House speaker Kevin McCarthy’s approval was a dismal 20% in the poll, while only 35% said they had a positive view of the House and 38% said the same of the Senate.Moderate House Republicans who represent districts Joe Biden won are frustrated with the White House’s refusal to negotiate over the debt ceiling, CNN reports.The Biden administration is currently pushing Congress to agree to a “clean” debt limit increase, without the conditions sought by the GOP leadership in the House. These moderate lawmakers could be crucial to bridging the narrow gap with Democrats in the lower chamber to make that happen, but several have told CNN that some kind of agreement needs to be reached on addressing America’s budget deficit.“I don’t think that a clean debt ceiling is in order, and I certainly don’t think that a default is in order,” Pennsylvania’s Brian Fitzpatrick said.Don Bacon of Nebraska said, “I’m not in favor of Biden’s no-negotiating strategy, and I’m not inclined to help,” adding, “The GOP can’t demand the moon, and Biden can’t refuse to negotiate. There needs to be give-and-take on both sides.”Mike Lawler, a New York Republican newly arrived in the House, said the Biden administration can’t ignore the GOP’s demands. “They need to come to a realization pretty quickly they are no longer in a one-party controlled government, and it requires negotiation.”The debt ceiling is the talk of the town in Washington DC, but in New York, it is merely a cartoon:A cartoon by @adamdouglasthom. #NewYorkerCartoons pic.twitter.com/Fhbe0IqaBc— The New Yorker (@NewYorker) January 19, 2023
      It is not even a particularly scrutable New Yorker cartoon, as this Washington Post reporter notes:?? What’s the joke lol pic.twitter.com/S9Th6bI2xM— Jeff Stein (@JStein_WaPo) January 19, 2023
      Brian Riedl is an economist who has advised a number of Republican politicians in the past, and shared some thoughts on Twitter about why the GOP is so eager to throw down over raising the debt ceiling:Democrats assert that the debt limit is the wrong place/time to address soaring deficits. Fine. But with 70% of spending and nearly all taxes on autopilot – untouchable in the annual budget process – perhaps they can tell us when they *would* be willing to address the issue?— Brian Riedl 🧀 🇺🇦 (@Brian_Riedl) January 17, 2023
      Deficit hawks would be happy to move the negotiations out of the debt limit debate. Just give us an alternative time and place and we’ll be there. If the answer is “never,” well, this is why – rightly or wrongly – critics will grab the only (admittedly bad) tool they have.— Brian Riedl 🧀 🇺🇦 (@Brian_Riedl) January 17, 2023 More

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      US government hits debt ceiling as Biden and House Republicans face off

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      US government hits debt ceiling as Biden and House Republicans face offTreasury secretary says department will take ‘extraordinary measures’ to skirt default while also urging Congress to act The US government has hit the ceiling on its debt, brushing up against its legal limit of $38.381tn and piling pressure on Congress to approve an increase to avoid a debt default in the coming months that would send a shock wave through the global economy.In a letter to congressional leaders, the treasury secretary, Janet Yellen, said it would begin taking “extraordinary measures” to make the government’s cash on hand last until Congress acts. These include a “debt issuance suspension period” lasting from today until 5 June, as well as suspending investments into two government employee retirement funds.JP Morgan chief says US should not be ‘playing games’ with debt ceilingRead more“As I stated in my January 13 letter, the period of time that extraordinary measures may last is subject to considerable uncertainty, including the challenges of forecasting the payments and receipts of the US government months into the future. I respectfully urge Congress to act promptly to protect the full faith and credit of the United States,” Yellen wrote.The countdown toward a possible US government default puts the spotlight on frictions between President Joe Biden and House Republicans, raising alarms about whether the US can sidestep a potential economic crisis.An artificially imposed cap, the debt ceiling has been increased roughly 80 times since the 1960s. The government can temporarily rely on accounting tweaks to stay open. Any major threats to the economy would be several months away.But with the House speaker, Kevin McCarthy, presiding over a restive Republican caucus, there are concerns that the government could default on its obligations for political reasons.Biden insists on a “clean” increase to the debt limit so that existing financial commitments can be sustained and is refusing to even start talks with Republicans. McCarthy is calling for negotiations that he believes will lead to spending cuts. It’s unclear whether enough fellow Republicans would support any deal after a testy start to the new Congress that required 15 rounds of voting to elect McCarthy as speaker.The White House press secretary, Karine Jean-Pierre, said it was the “constitutional responsibility” of Congress to protect the full faith and credit of the United States.McCarthy said Biden needs to recognize the political realities that come with a divided government. The speaker has called for spending cuts of a kind that did not occur under President Donald Trump, a Republican who in 2019 signed a bipartisan suspension of the debt ceiling.The Senate Republican leader, Mitch McConnell, said on Thursday in Louisville, Kentucky, that he was unconcerned about the situation because debt ceiling increases are “always a rather contentious effort”.“America must never default on its debt,” McConnell said. “We’ll end up in some kind of negotiation with the administration over what are the circumstances or conditions under which the debts are going to be raised.”Any deal would need to pass the Democratic-run Senate. “There should be no political brinkmanship with the debt limit,” said the Senate majority leader, Chuck Schumer, a Democrat from New York. “It’s reckless for Speaker McCarthy and Maga Republicans to try and use the full faith and credit of the United States as a political bargaining chip.”In order to keep the government open, the treasury department on Thursday was making a series of accounting maneuvers that would put a hold on contributions and investment redemptions for government workers’ retirement and healthcare funds, giving the government enough financial space to handle its day-to-day expenses until roughly June.What happens if these measures are exhausted without a debt limit deal is unknown. A prolonged default could be devastating, with crashing markets and panic-driven layoffs if confidence evaporates in a cornerstone of the global economy, the US treasury notes.The government would have to balance its books on a daily basis if it lacks the ability to issue debt, and it would have to impose cuts equal in size on an annual basis to 5% of the total US economy.Analysts at Bank of America cautioned in a report last week that “there is a high degree of uncertainty about the speed and magnitude of the damage the US economy would incur”.Markets so far remain relatively calm, given that the government can temporarily rely on accounting tweaks to stay open and any threats to the economy would be several months away. Even many worried analysts assume there will be a deal.TopicsUS economyJanet YellenEconomicsUS politicsRepublicansDemocratsnewsReuse this content More

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      in US Politics

      JP Morgan chief says US should not be ‘playing games’ with debt ceiling

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      JP Morgan chief says US should not be ‘playing games’ with debt ceilingJamie Dimon warns that US creditworthiness should be ‘sacrosanct’ as country’s debt races toward $31.4tn limit The US should not be “playing games” with the debt ceiling, the JP Morgan chief executive, Jamie Dimon, warned warring US political factions on Thursday as a heated row over the federal borrowing limit reached a crisis point.“We should never question the creditworthiness of the US government. That is sacrosanct and it should never happen,” Dimon said on Thursday in an interview on CNBC. “This is not something we should be playing games with at all.”​Dimon’s comments came as the US treasury department announced later Thursday it would take steps to keep paying the federal government’s bills as the US hit its $31.4tn debt limit as expected.In a letter addressed to the Republican House speaker, Kevin McCarthy, the treasury secretary, Janet Yellen, said the department will suspend new investments in the civil service retirement and disability fund, as well as the postal service retiree health benefits fund until June.Yellen warned that moves were subject to “considerable uncertainty” if Congress does not pass a bill to increase the borrowing limit. Last week, she had sought to head off an impasse over the US’s borrowing that if breached could begin to seize up debt repayments and send shock waves throughout the US and global economies.What is the US debt ceiling and what happens if it isn’t raised?Read more“Failure to meet the government’s obligations would cause irreparable harm to the US economy, the livelihoods of all Americans and global financial stability,” Yellen told Congress.She said that the Biden administration would try to keep the country under that debt cap and able to finance its operations as long as possible by using “extraordinary measures” that involves shifting money and suspending investments in savings plans for government workers.In theory that could give lawmakers until June to come up with a solution, but Yellen also warned that the US treasury “is not currently able to provide an estimate of how long extraordinary measures will enable us to continue to pay the government’s obligations”.Political wrangling over US treasury debt, which has doubled in a decade, is a traditional battlefield for political parties. Since 1960, politicians have moved to raise, extend or revise the debt limit 78 times.The White House maintains that the ceiling should be increased without conditions and will not negotiate on the issue. Republicans are urging a “debt prioritization” plan that would seek to avert default.“We’re not going to default on the debt. We have the ability to manage servicing and paying our interest. But we similarly should not blindly increase the debt ceiling,” Representative Chip Roy, a leading conservative Republican, told Reuters.But Dimon, regarded as America’s most powerful and most forthright banker, warned against playing political football with the issue.“Of course Democrats will blame the Republicans and Republicans will blame the Democrats,” Dimon told CNBC. “I don’t care who blames who. Even questioning it is the wrong thing to do … That is just a part of the financial structure of the world. This is not something you should be playing games with at all.”TopicsUS economyJamie DimonEconomicsUS politicsnewsReuse this content More

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      What is the US debt ceiling and what happens if it isn’t raised?

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      ExplainerWhat is the US debt ceiling and what happens if it isn’t raised?The US treasury secretary warned ‘extraordinary measures’ will have to be put in place to prevent defaulting – here’s what that means for the government The US government will hit its borrowing limit – or the debt ceiling – on 19 January, the beginning of what looks to be a vicious fight over the government’s budget and one that threatens to worsen an already precarious economic outlook.The US treasury secretary, Janet Yellen, sent an ominous letter of warning to Congress last Friday that “certain extraordinary measures” will have to be put in place to prevent the United States from defaulting on its obligations” – essentially moving some money around so the government does not default just yet. Those measures will last a few months, but if the limit is ultimately not raised, the federal government will run out of funds.Here is more on the debt ceiling and what it means for the federal government.What is the debt ceiling?Congress has the ability to set a limit on how much the US government can borrow to pay for its expenses. This limit is called the debt ceiling, and right now the limit is $31.4tn. Borrowing money helps the federal government pay for expenses passed in its budgets, like social security and Medicare benefits and the salaries of US military service members.What happens if the debt ceiling isn’t raised?If Congress does not raise the debt ceiling in the coming months, things will quickly go south for the economy, Yellen warned.“Failure to meet the government’s obligations would cause irreparable harm to the US economy, the livelihoods of all Americans, and global financial stability,” she wrote.If the federal government defaults on its loans, investors could lose faith in the US dollar, causing the US dollar to weaken, stocks to fall and triggering job cuts.Even if the debt ceiling is raised, a prolonged fight over it could still cause long-term financial harm. During a particularly vicious debt-ceiling battle in 2011, credit rating agency Standard & Poor downgraded the US government’s credit rating for the first time in history, making it more costly for the US government to borrow money thereafter.Why isn’t Congress raising the debt ceiling?Republicans have a fresh majority in the House, and they see the debt ceiling as a possible bargaining chip for negotiating spending cuts.House speaker Kevin McCarthy said on Fox News Sunday that reaching the debt ceiling is a test for the party on its commitment to cutting spending.“You couldn’t just keep increasing it,” he said. “Let’s sit down and change our behavior for the good of America. Because what we’re going to do is bankrupt this country and bankrupt these entitlements if we don’t change their behavior today.”The White House press secretary, Karine Jean-Pierre, said the administration will not be doing “any negotiations”.“It should be … done without condition,” she said.With Republicans holding onto the necessary votes needed to lift the ceiling, the fight to raise it could get ugly.In a joint statement, the Senate majority leader, Chuck Schumer, and the House minority leader, Hakeem Jeffries, said Democrats want to move quickly on passing a new debt ceiling.“We’ve seen in previous debt ceiling stand-offs that even the threat of default leads to even higher costs for working families,” they said. “Default forced by extreme Maga Republicans could plunge the country into a deep recession.”What do Republicans want?Exactly how much Republicans want to cut, and what they want to target, is still unclear. And while Republicans often rally against government spending, raising the debt ceiling funds government expenses that have already been passed by Congress. Not being able to borrow more money will put existing federal programs at risk.But Republicans, particularly the more conservative members of the party, are gearing themselves up for a battle over the ceiling.Some are even thinking Republicans can push for a payment prioritization plan that would call on the Biden administration to make only critical federal payments, like social security and Medicare. The Washington Post reported that McCarthy privately made a deal with conservative Republicans when he was fighting to get the speaker title to pass a prioritization plan in the first quarter of the year. The details of the plan are not set but make clear that Republicans are gunning for cuts.Responding to the Post’s report of the plan, the White House chief of staff, Ron Klain, tweeted that Republicans want to make “payments to wealthy foreign bondholders” in lieu of funding other federal programs like national parks and food stamps.Why does the debt ceiling exist?Experts have pointed out for years that there is no good reason why the debt ceiling exists and that raises should be routine. Few other nations have similar limits, and in recent history, it has largely been a political negotiating chip between parties – one that carries heavy consequences.What happens next?Expect months of wrangling and leaks. The Republican plan is not yet clear but it is clear that the newly empowered party – and especially its more conservative wing – wants to make its mark.Fights to raise the debt ceiling have led to government shutdowns in the past. The longest-ever shutdown was 35 days between 22 December 2018 and 25 January 2019 at a cost of $11bn – $3bn of which was permanent.So far stock markets do not seem to be rattled, suggesting investors think this is another war of words. Over the next few months, that could change.TopicsUS economyUS CongressUS politicsEconomicsexplainersReuse this content More

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      Treasury secretary: US to reach debt ceiling on Thursday

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      Treasury secretary: US to reach debt ceiling on ThursdayJanet Yellen told Congress that ‘extraordinary measures’ would be taken to avoid default until legislation is passed to raise ceiling Janet Yellen, the US treasury secretary, has notified Congress that the US is projected to reach its debt limit on Thursday, 19 January, and will then resort to “extraordinary measures” to avoid default.In a letter to House and Senate leaders on Friday, Yellen said her actions will buy time until Congress can pass legislation that will either raise the nation’s $31.4tn borrowing authority or suspend it again for a period of time.US prices drop for first time since May 2020 as inflation rate falls to 6.5%Read moreShe urged lawmakers to act quickly to raise the debt ceiling to “protect the full faith and credit of the United States”.“Failure to meet the government’s obligations would cause irreparable harm to the US economy, the livelihoods of all Americans and global financial stability,” she said.Republicans now in control of the House have threatened to use the debt ceiling as leverage to demand spending cuts from Democrats and the Biden administration. This has raised concerns in Washington and on Wall Street about a bruising fight over the debt ceiling this year that could be at least as disruptive as the protracted battle of 2011, which prompted the brief downgrade of the US credit rating and years of forced domestic and military spending cuts.The Washington Post reported late on Friday that House Republicans had prepared an emergency plan for breaching the debt limit. The proposal, which was in the preliminary stages of being drafted, would direct the treasury department to prioritize certain payments if the US hits the debt ceiling, according to the newspaper.The White House said on Friday after Yellen’s letter that it will not negotiate over raising the debt ceiling.“This should be done without conditions,” White House spokesperson Karine Jean-Pierre told reporters. “There’s going to be no negotiation over it.”The new House speaker, Kevin McCarthy, told reporters in his first press conference that he had a “very good conversation” with Biden about the coming debt ceiling debate. “We don’t want to put any fiscal problems to our economy and we won’t, but fiscal problems would be continuing to do business as usual,” he said.“We’ve got to change the way we are spending money.”The proposal from House Republicans reported by the Washington Post would call on the Biden administration to make only the most critical federal payments if the treasury department comes up against the statutory limit on what it can legally borrow. The plan will call on the department to keep making interest payments on the debt, the newspaper reported, citing sources.House Republicans’ payment prioritization plan may also stipulate that the treasury department should continue making payments on social security, Medicare and veterans benefits, as well as funding the military, the newspaper added.Yellen said that while the treasury can’t estimate how long the extraordinary measures will allow the US to continue to pay the government’s obligations, “it is unlikely that cash and extraordinary measures will be exhausted before early June.”The treasury department first used extraordinary measures in 1985 and at least 16 times since, according to the Committee for a Responsible Federal Budget, a fiscal watchdog. Those measures include divesting some payments, such as contributions to federal employees’ retirement plans, in order to provide some headroom to make other payments that are deemed essential.Past forecasts suggest a default could instantly bury the country in a deep recession, right at a moment of slowing global growth as the US and much of the world face high inflation because of the pandemic and Russia’s invasion of Ukraine. The financial markets could crash and several million workers could be laid off, and the aftershocks would be felt for years.Shai Akabas, director of economic policy at the Bipartisan Policy Center, told reporters Friday: “This is not the time for panic, but it’s certainly a time for policymakers to begin negotiations in earnest.”“Most policymakers agree that we have a major fiscal challenge as a country, our debt is unsustainable,” he said. “There’s no reason why we couldn’t agree on measures to improve our fiscal outcome, and also ensure that we are paying all of our bills in full and on time.”TopicsJanet YellenUS economyUS CongressUS politicsEconomicsnewsReuse this content More