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Top Ten Facts You Need to Know About Why We Need to Raise the Federal Debt Ceiling

Unprecedented Conservative Demands Created This Crisis, but Congress Must Come Together to Solve It

SOURCE: AP/Manuel Balce Ceneta

Despite President Barack Obama's bending over backwards to meet Republican demands, they still refused to make a deal.

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The U.S. Congress this weekend and early next week will hopefully reach a deal to raise the federal debt ceiling before time runs out on August 2. Here are 10 facts that you need to know to understand why we need to raise the federal debt ceiling by then, and why we’re in this mess in the first place.

1. Failing to raise the debt ceiling will cause a downgrade in the United States’s AAA credit rating, resulting in higher interest rates for American families and businesses. Rating agencies S&P and Moody’s say they will downgrade the United States’s credit rating if the government fails to raise the debt limit by August 2. U.S. creditworthiness keeps interest rates low, easing the burden on consumers and homeowners while allowing businesses to invest. If the debt limit is not raised, American families and small businesses will pay the price in the form of higher interest rates.

2. Failing to raise the debt ceiling could cause a second recession. After August 2, the federal government will be unable to pay all of its bills. As a result, some people who are expecting to receive a check—either for benefits such as Social Security or for services rendered to the federal government—may not get it. The withdrawal of billions of dollars from the economy could well be enough to plunge the United States back into a recession. In fact, if the debt limit remains frozen throughout September, the ensuing loss may be even greater than that suffered during the worst quarter of the Great Recession.

3. Failing to raise the debt ceiling could cause the financial markets to crash. A report from Credit Suisse finds that stocks could fall as much as 30 percent and the economy could contract as much as 5 percent over the next 6 to 12 months. Without an agreement within three to six months of the Aug 2 deadline, the bank predicts a “very significant” risk of another recession.

4. Failing to raise the debt ceiling would make the long-term deficit problem worse. JP Morgan Chase & Co. estimates that a downgrade in our credit rating could cost the U.S. $100 billion a year in higher interest payments.

5. Failing to raise the debt ceiling will leave the government unable to pay for vital social services. If the United States does not raise the debt ceiling, then the federal government will be forced to immediately cut its spending by 40 percent. The Treasury Department could opt to prioritize payments toward defense spending, Social Security, Medicare and Medicaid, and unemployment insurance. If this happens then other crucial programs will be immediately halted. These will likely include food stamps and other nutritional programs, Pell grants, affordable housing and low-income rental assistance programs, educational programs for disadvantaged children, early child development services, and job training programs for dislocated workers.

6. Failing to raise the debt limit will result in huge cuts to state services. The states rely on hundreds of billions of dollars in funding from the federal government every year–funding that will end if the U.S. government does not increase the debt limit. Already cash-strapped states will face the loss of billions of dollars that fund employment and training programs, hazardous waste removal, health care services, and law enforcement support, to name just a few.

7. Since 1962, Congress has increased the debt limit 74 times without causing a crisis. Ten of those increases have taken place in the past 10 years. By demanding draconian cuts to Social Security, Medicare, and Medicaid in return for their votes to raise the limit, Republicans have turned a routine budgetary procedure into a potential economic catastrophe.

8. Republican leadership walked away from a deal that included even more spending cuts than any other bipartisan plan. President Obama’s latest offer to Republican leadership contained about $1 trillion less revenue than the recent proposal from the Gang of Six, as well as less revenue than the Bipartisan Policy Center plan, the Bowles-Simpson plan, and the original debt reduction framework offered by the White House. Despite the president’s bending over backwards to meet Republican demands, they still refused to make a deal.

9. Thirty-nine Republicans in the House of Representatives have pledged to oppose a debt limit increase unless Congress first passes a constitutional amendment to cap federal spending at 1966 levels. The constitutional amendment that these members favor would limit federal spending to 18 percent of gross domestic product, a level not seen in nearly 50 years. It would require making massive cuts to all aspects of the federal government, including Social Security, Medicare, Medicaid, and defense. These far-right members are trying to use the debt limit as leverage to force their preferred vision of government into the U.S. Constitution.

10. The House leadership’s “compromise” plan has no chance in the Senate. Fifty three Senators have signed a letter to Speaker of the House John Boehner (R-OH) saying they will not vote for his plan, which would raise the debt ceiling only through the end of this year. Instead of working on a real compromise, House Republicans are wasting time on a plan that will slash entitlements, fail to prevent a downgrade in the United States’s credit rating, and has no chance of passing the Senate or being signed into law by the president. This is no way to run a government.

Michael Linden is Director of Tax and Budget Policy at the Center for American Progress. Sarah Ayers is a Research Associate with the Economic Policy team at the Center.

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