Want to know how strapped for cash Uncle Sam is? The U.S. Treasury has been moving money around and borrowing from federal workers' retirement funds just to make ends meet. So it should come as no surprise that the Senate voted Thursday (March 16) on a request by the White House to raise the federal debt limit by $781 billion to almost $9 trillion, in order to avoid the first-ever government default on U.S. Treasury notes.
The raise marks the fourth time since 2002 that President Bush has asked Congress to up the limit on how much the government can borrow to cover the cost of everything from national parks to the war in Iraq.
The measure passed on a party-line vote of 52-48, with Senate Democrats protesting the move and asking for assurances that the Bush administration will show more fiscal restraint and rein in the debt. Republican leaders in the Senate put the vote off as long as possible, according to a CBS News report, waiting until the federal government was just a week away from not being able to pay its bills. Treasury Secretary John Snow warned last week that unless immediate action was taken, the government would hit the current $8.18 trillion ceiling by March 24, leading to a default on its loans.
Had the government gone into default, it would have set up a global financial crisis of "immeasurable proportions," according to Aleh Tsyvinski, an assistant professor in Harvard University's economics department.
"The U.S. is such an important part of the world economy that if it defaults, it could lead to consequences we haven't seen since the modern economic system was put into place," Tsyvinski told MTV News. "The collapse of the dollar, a massive dumping of U.S. bonds and a request for the return of loans from other countries — that would have ramifications across the world."
What else happens if the federal government goes into default? Federal workers don't get their paychecks, national parks close down, college loans don't get paid out, Medicare and welfare checks are held up, and the space shuttle goes into dry dock, to name just a few repercussions.
With the measure's passage, the government can continue to pay for the war in Iraq and finance Medicare and other big government programs without raising taxes. But with a nearly $400 billion budget deficit expected for this year and next, another increase in the debt ceiling will likely be required next year. The debt limit has grown by more than $3 trillion since Bush took office.
The national debt is the difference between what the government spends and collects in taxes, fees and other revenue. The debt is covered by the Treasury through the auction of $20 billion a week in U.S bonds and other securities as older federal notes expire. Per the National Debt Clock, each American's share of the debt was $27,723.99 as of March 10, according to a Scripps Howard News Service report, and increasing by $2.17 a day.
"When it comes to deficits, this president owns all the records," Senate Minority Leader Harry Reid said after Thursday's vote, according to CBS News. "The three largest deficits in our nation's history have all occurred under this administration's watch."
The national debt crossed the $1 trillion mark in 1981 under President Ronald Reagan and grew to $3.2 trillion during the presidency of George H.W. Bush. During the administration of Bill Clinton, it hit $5.5 trillion, but government surpluses enabled Congress to pay down some of the debt. Since President George W. Bush has been in office, the figure has climbed from $5.6 trillion to the new $9 trillion mark (see "Bush's Proposed Budget Cuts Programs, Increases Defense Spending").
The question is, can the figure keep climbing indefinitely?
Professor Tsyvinski puts it this way: "Would you like to have a credit card? Sure. Because during those times when you need money, it's good to be able to borrow it. But if you keep rolling it over and spending, if you don't become richer, you will have to cut your spending at some point."
Tsyvinski said that continually raising the debt ceiling is OK only if the economy continues to grow faster in the future. But if the economy slows down at some point, drastic cuts in government spending will have to be made in order to pay down the massive debt.