Understanding the So-Called Debt Ceiling Crisis

I am not a professional economist and have often tuned out the talk about our government's deficit spending, debt ceiling and other such things because I just thought it was too complicated. Recently though with all the hoopla about the debt ceiling and threats of default and our country's credit rating being downgraded I felt compelled to become informed. If you can relate then read on. So here is my attempt at explaining this in simple terms.

What is the deficit? If you make $1000 a month and spend $1500 in that same month you have spent more money than you have made. You are running a deficit of $500. If on the other hand you spend only $800 in that month you have a surplus. So a deficit happens when you spend more than you make.

What is the debt? If you have a deficit you have to pay for it by increasing your income or getting a loan. Since most of us cannot instantly increase our income a deficit leads to debt. If you continue to operate at a deficit each month then your debt will continue to get bigger.

What is the debt ceiling? The government's debt ceiling is like your personal credit limit. If you have a credit card it comes with a certain limit that you can run the balance up to. That is your credit limit with that card. The debt ceiling is the government's limit that it can borrow money up to.

So with that basic understanding what is the so-called debt ceiling crisis really all about? The government has obviously been running a deficit for a while and has been running up its debt to the point where it cannot borrow any more money under the current credit limit. When the average citizen runs into this problem they can ask their credit card company for a credit limit increase, or they can take a serious look at their spending and try to get it under control. The term "Live within your Means" comes to mind.

Now, we've all probably operated under a deficit at one point or another and there could be many reasons for doing that. Continually operating at a deficit is not a good idea though. So you have two choices. Get your spending under control or increase your income. Which is practically easier to do? I have found over the years that it did not matter how much money I earned, if I did not consciously control my spending I would end up spending all of it if not more.

So in its simplest form that is what the current debate in Washington DC is all about. The Republicans want to get government spending under better control while the Democrats led by the President want to keep the current spending rate, increase the debt limit, and try to make up the difference by increasing taxes.

Of course the problem at hand is more complicated than that. There are tough choices to be made but there is not a pending doom or disaster if the credit limit is not increased. Social Security checks will continue to go out because they are funded by payroll taxes taken out of our paychecks. The country does not have to default on its loans because it can cover that expense from the Federal Income Tax withheld from our paychecks. So all the talk about defaulting on the loans and Social Security checks not going out is simply not true. Those making those claims are just trying to scare people into pressuring congress to increase the credit limit.

To be sure there are tough choices to be made but that's what adults are supposed to do. The government cannot continue to spend with reckless abandon. The government needs to get spending under control, just like the rest of us have had to do through this difficult economic period.

If you want more details check out the information gathered by Fact Check regarding all this.

Resource:

Fiscal FactCheck | FactCheck.org