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The Shutdown and the Debt Ceiling Explained

10/25/2013 04:31 pm ET | Updated Mar 11, 2015

In the 11th hour last Wednesday night, Congress and the president passed a bipartisan budget and raised the debt ceiling, reopening the government agencies that had been closed for more than 16 days and averting a near catastrophic default on the nation's debt. But what does all this mean?

There are three components at play here that are important to know as U.S. citizens: first, the Affordable Care Act; second, the government shutdown; and third the debt ceiling. To understand how one has affected the political environment in Washington the past few weeks, as well as nationwide, one must look at all three together.

It is important to have a general understanding of the Affordable Care Act (the "ACA"), also known as ObamaCare. This legislation provides affordable health care for all American citizens. We won't get into the complexities of the legislation here, but it is important to know that Democrats view the ACA as the most important legislation our government has enacted in several decades. Republicans, however, have a strong aversion to the ACA, contending that it is the "socialization" of our health care system. Republicans oppose the ACA so much that they have attempted to repeal it over 40 times, each without success.

Congress is evenly split on the issues, which is the cause of the constant gridlock you probably hear about. Republicans control a majority of the House of Representatives, Democrats control a majority in the Senate, and President Obama is also part of the Democratic Party. All three need to pass a bill for it to become law. So in situations where they are evenly split, such as the ACA, you can see why there is gridlock and nothing getting done. This becomes especially important when two upcoming bills needed support to be passed for their deadlines: the annual budget bill, and the debt ceiling.

Flash forward to a mid-September: Tea Party Republicans in the House, who find the ACA an abomination to the fundamental freedoms of our nation, began to say that they will only pass a budget that repeals the ACA. A new budget is needed every year for the discretionary spending of the government and is due by the end of the fiscal year: October 1. Republicans in the House, largely led by Senator Ted Cruz (Texas) and Speaker John Boehner, began voting on several budget plans that either defunded or repealed the ACA, and as soon as they got to the Democratically ruled Senate, they were shot down. The two parties could not reach a consensus as Republicans refused to pass anything that did not repeal or edit the ACA, and the Democrats refused to pass anything that even mentioned the ACA, as it was a budget debate and the ACA had already been brought into law.

Low and behold, October 1 rolls around and no bipartisan plan had been laid out by either party. By bipartisan I mean, both parties compromising and working together. This didn't happen and so the discretionary spending of the government was cut. All non-essential government employees were put on furlough. It is important to note that mandatory spending of the government was kept open, which is why you probably saw the post office open and then wondered what people meant by the government being closed. More than 800,000 federal employees were furloughed, and it cost the government over $150 million a day. The last time the government shutdown was for similar reasons of partisan bickering in 1995 when Bill Clinton was president.

To make matters more confusing, the nation was coming close to hitting the debt limit. What is the debt limit? It's a completely separate issue from the shutdown, but they often seem to be combined in political conversation of partisanship. It was created in 1917 so that Congress could keep track of the accumulating debt and try to keep itself in check by not spending too much; racking up what is the equivalent of a massive credit card bill. The U.S. government has an annual revenue of $2.71 trillion. This seems like a lot, until you realize our government spends around $3.8 trillion annually. That's a big gap between the money we are spending, to the money we are making.

So how do we make up the difference? We take out loans. Around 40 cents to every dollar in the U.S. is borrowed, much of it through U.S. Treasury bonds that the government sells to individuals, foreign nations and large international corporations, among others. The current U.S. debt stands a little under $17 trillion, and consists of money that we owe from having borrowed in the past, as well as interest that we owe on those loans. Congress and the president agreed on a debt ceiling increase in 2011. That is the debt limit that the Treasury said the U.S. would hit on Oct. 17, 2013. If the government hits the debt, the government will be in default on its debt, which is why it was imperative for Congress to work together.

Defaulting means the government would no longer be able to borrow all the money they do to make ends meet, and would be able to spend only as much money as it makes. The 40 cents to every dollar the government spends would no longer be available. The government would no longer be able to pay its bills, the most important of which is the interest it owes on the bonds it has previously sold.

Not being able to pay interest to bondholders would destroy the reputation of U.S. Treasury bonds as the safest and most reliable investment in the world. Countries, companies, and individuals would move their investing to places like Europe or Asia and the world economy, and, the U.S. would suffer from severe economic setbacks (think 2008 meltdown, but far worse) if this occurred.

The reason raising the debt ceiling became so difficult was because, just as in the budget debate, Congress couldn't agree because Republicans were saying they were only going to pass a debt ceiling bill that repealed the ACA, and Democrats refused again.

The shutdown and debt ceiling debates began a great public relations war between the two parties as they tried to blame one another for the negligence causing the shutdown. Politicians played a colossal game of chicken, with House Republicans hoping to see President Obama and the Senate fold under the pressure and scale back funding for the ACA, while the White House and Senate tried to shame the Republicans into acting as they launched a campaign stating that the Republican party was holding the country hostage. Keep in mind, while all this was going on, the government was still in shutdown mode and the government was about to hit the debt limit, which would have catastrophic effects on the economy.

No one knows what would have exactly happened if the U.S. defaulted, because it has never happened before, but to give you an idea the U.S. Treasury Bonds would lose their reputation as the most sound form of investment, hiring would come to a halt and unemployment would rise rapidly amid uncertainty. Interest rates would dramatically rise and the ripple effects of the default would throw the world economy into a depression. Our country would never fully recover.

This apocalyptic crisis was averted late Wednesday night when Senators Mitch McConnell (R - KY) and Harry Reid (D - NV) drafted a bipartisan budget bill to fund the government through Jan. 15 and extend the $16.7 trillion debt ceiling through Feb. 7, 2013. The bill passed very quickly in the Senate and the House and was ultimately signed by the president just before midnight Wednesday evening, which dodged the impending debt default.

In the end, it seems there were no winners as President Obama put it; the favorability polls of all involved decreased, from the Republicans to the President. Most dramatically by far though was the House Republicans whose favorability fell to its lowest in recorded history of five percent according to a Gallop poll.

Thankfully, we'll never know exactly what would have happened if the U.S. defaulted last week. But the threat still looms and will revisit our nation in February. We could be on the ropes again in February. Buckle up.

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