What even is the national debt ceiling? An explanation

As most of us continue to deal with our own personal finances, there is a national debt ceiling crisis that's looming over the country. What the heck is the debt ceiling and how does it — or could it — affect Georgians? If you are one of the people saying any or all of that, we've got some answers for you today. We're going to get an economic lesson from Raymond Hill, senior lecturer of finance at Emory University's distinguished Goizueta Business School in Atlanta.

Raymond Hill: We have this strange thing that Congress can spend money. That's what its function is under the Constitution, to authorize spending. But then in order to spend more than we take in in taxes, then we're going to have a deficit and that's going to then add to the national debt. So in addition to Congress voting to spend money without raising taxes, it has also imposed — on itself — another requirement, that from time to time, it raises the amount of borrowing that the government can do to pay for those expenditures which are not paid for by taxes.

Leah Fleming: We've heard about this every few years or so. We'll hear about, you know, that this crisis could be looming. And I'm wondering: How bad are the consequences of an actual default, if that would ever happen?

Raymond Hill: Well, the consequences of an actual default — so we go to the end and there's never a resolution — are disastrous. And so — for every one of us. We'd go into a huge recession. The world financial system would be in chaos. It would be, you know, 10 times worse than what we went through in COVID or went through in the financial collapse of 2008 and 2009. It really would be a huge disaster.

Leah Fleming: So —

Raymond Hill: The reason is — there are two reasons. One is that because we need to keep borrowing in order to fund our expenditures. So that would cease immediately. But it's also that the U.S. dollar is where countries keep their international reserves. It's the currency for international trade. So it'd really bring the whole world's financial system to a grinding halt.

Leah Fleming: I was doing some reading and I saw that back in 1835 and 1837, the U.S. was actually debt free. I'm wondering, is that ever possible again, do you think?

Raymond Hill: Well, not in your lifetime and certainly not in my lifetime. But you have to remember that in, in the '90s, OK, we had a booming economy and we had we actually ran some budgetary surpluses from year to year. So the debt fell. And in the 1990s, economists were contemplating, "Well, if we keep running these services, what's going to happen when there's no national debt?" People actually thought about it for a brief period of a couple of years. But then we had, you know, the spending returned and you know, we're going to have a national debt for, you know, I guess I said your lifetime and my lifetime and in my children's lifetime as well. You know, the issue here is that the reason people feel strongly about it is we don't know how much national debt is too much. We know that all of us currently are pushing this burden to the future generations. At some point, the national debt becomes so large that it either cuts into other things we want to do — it's a matter of national security because we can't spend money on defense — or people begin to worry that we're not going to repay it and then we have a financial crisis. But we don't know what that number is. And that's why there's so much anxiety here — especially on one side here — that we, you know, we do something to control it. And it's exactly why I think, you know, you're not going to see Congress get rid of the vote on the debt ceiling because they don't want to be seen as not caring at all about the national debt. But they still like to spend money.

Raymond Hill is senior lecturer of finance at Emory University's Goizueta Business School.