The Debt Ceiling: A Primer for College Students

With debt ceiling negotiations nearing their apex and nothing less than the world economy at stake, this is the most important debate this country has seen in a long time.
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OK, let's be honest. You're a college student. It's summertime, and you're busy. Maybe it's an internship, maybe it's study abroad or maybe it's just relaxing by the pool. In your crazy schedule, you haven't quite kept up with the news as you should have. You've heard things about the debt-ceiling debate here and there, but you don't quite know what exactly is going on. Well, it's time to listen up. With the negotiations nearing their apex and nothing less than the world economy at stake, this is the most important debate this country has seen in a long time -- and NextGen Journal is here to get you caught up to speed.

The Problem: The United States has hit its self-imposed $14.3 trillion limit on borrowing money. Because the budget isn't balanced, the ceiling must be raised to continue government functions and to avoid defaulting on our obligations. However, Republicans -- who control the House of Representatives -- have refused to approve any increase in the debt limit unless it comes along with a major deficit-reduction plan. Therefore, a number of players (see below) have been involved in negotiations for weeks to find a deficit-trimming compromise that both parties will agree to.

The Time Frame: Treasury Secretary Timothy Geithner has maintained for some time now that a deal must be in place by August 2 for the United States to avoid defaulting. The Obama administration has suggested that this means a compromise must actually be reached by July 22 so that legislation can be drafted and passed in time for cash to begin flowing again.

The Consequences of Failure: A failure to raise the debt ceiling could be catastrophic. The government would be forced to immediately cut spending by 40 to 45 percent -- spending that Congress has already mandated in its budget. The administration, therefore, would be forced into choosing between legally mandated avenues of funding. Even if the government prioritizes bondholders, it will not be able to pay soldiers, write Social Security checks or pay for Medicare procedures. The apparatus of the federal government would grind to a halt -- and since the Treasury bill is the bedrock of the world financial system, it's quite possible that a financial meltdown far bigger than 2008 could occur. Regardless, the effects on the American economy would be devastating.

The Key Players: President Obama is involved in what could be the most important debate of his first term. He is trying to balance the demands of the more liberal members of his party with the need to reach a deal. He has already stretched himself beyond what most Democrats would have preferred by offering Republicans a package that consisted of 83 percent spending cuts and 17 percent tax increases, far more weighted towards cuts than any deficit deal before him -- including those enacted under Republican presidents. Obama has stood firm, however, in his calls for the elimination of some tax expenditures, and would prefer to see the wealthy pay more in taxes. Obama is now directly involved in the negotiations on a daily basis.

Speaker of the House John Boehner (R-OH) is leading the Republican side of the negotiations since he controls the body of Congress that is obstructing any deal in the first place. Boehner has repeatedly admitted that the debt limit needs to be raised to avoid catastrophic consequences, but must deal with the extreme right wing of his party, such as Tea Party heroine Michele Bachmann (R-MN), who believes that the debt ceiling should not be increased under any circumstances. Boehner has consistently maintained that his party will not agree to any tax hikes, but he has left himself some wiggle room on tax expenditures in case he needs to compromise.

House Majority Leader Eric Cantor (R-VA) represents a large portion of the Tea Party base and has made life more difficult for Boehner by insisting that the closing of any tax loopholes should only be used to lower taxes or pay for spending cuts elsewhere. Cantor was initially deeply involved in the negotiations led by Vice President Joe Biden, but walked out a few weeks ago when he felt that the talks were no longer progressing.

House Minority Leader Nancy Pelosi (D-CA) and Senate Majority Leader Harry Reid (D-NV) are in a difficult position, for while the president is the unquestioned leader of the Democratic Party, many liberal Democrats are already unhappy with the proposed budget deals. Pelosi and Reid must convey that unhappiness to the President while ensuring that any deal approved by Obama receives full Democratic support.

The Current Situation: While there was briefly talk of a mammoth $4 trillion deal at the end of last week, Boehner eventually rejected the terms of the deal put forth by the White House. While Obama continues to push for a deal of that size, Boehner believes that an eventual deal must reduce the deficit by $2 trillion over 10 years. At this point, the negotiations seem to be hung up mostly over taxes, as it is already clear that spending cuts will make up the vast majority of the deal. It doesn't look like a deal will be struck any time soon, but with the clock ticking, it's probably high time for one.

By Allan Joseph for NextGen Journal.

NextGen Journal is the national website for college students -- featuring news, insight, analysis and the voices of our generation.

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