The debt ceiling is literally the maximum amount of money congress allows itself to borrow. It doesn't serve any practical purpose since all the spending obligations have already been committed to BY congress and even if we were to default we would later go back and pay everyone. Would you spend money on your credit card and then refuse to raise your limit in order to avoid paying overage fees? Obviously the problem is with your spending/income ratio and not your debt limit.
Increasing the debt ceiling is normally a routine procedure(having been increased 78 times since 1960), but this time is different for a couple of reasons . For starters the current crop of Republicans have both committed themselves very heavily and publically to reducing federal spending as well as preventing the reelection of Obama. Making a stand on raising the debt ceiling clearly provides a soapbox to advance both goals.
In addition to this, the recent spate of US spending, largely driven by the stimulus packages, has been the cause of some concern. Economists largely agree that the Bush and Obama stimulus packages prevented much more severe economic problems, but that isn't to say they come at no cost. As a result of US expenses increasing much faster than its revenue credit rating agencies have stated they must see some plan in place to reduce the deficit in the medium-long term and that simply raising the debt ceiling is not sufficient to avoid a downgrade of credit rating.
With rating agencies demanding to see change in US fiscal policy and growing national concern over the federal deficit the moment was ripe for a pretty serious confrontation.
Both parties have advanced multiple plans up to this point but so far none of succeeded in gaining the bi-partisan support required to pass it. The biggest hurdle has been the disconnect on revenue. Both parties agree spending cuts must take place, even in some of the same places, but Republicans have refused to agree to anything involving a tax increase and Democrats have refused to agree to anything involving no tax increase.
Something worth noting here is that cutting services while maintaining the same tax rate is a de facto tax increase. When Hershey decreased the size of its flagship candy bar from 1.65oz to 1.55oz but kept the price the same nobody felt like they were getting a good deal because they now were consuming fewer calories.
In the next part I will talk a bit about the proposed Boehner and Reid plans just evaluated by the CBO.
