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Monday, October 14, 2013

Current Events Lesson - Debt Ceiling Crisis

The debt ceiling crisis seems to hang over the American (and world) economy about once a year.  This year, however, the struggle appears much more apocalyptic.

With the Republican-controlled House of Representatives demanding negotiations on deficit spending--particularly spending related to the Affordable Care Act--and the Democratic-controlled Senate demanding a hike in the debt ceiling with no strings attached, this debate is especially bitter.  Both sides blame the other in a contest that portends to punish the first one who blinks.

Both sides do agree that a government default would be catastrophic for both the American and world economies.  With this understanding it does seem probable that a deal will be brokered, albeit with likely only a few seconds left on the clock before the October 17 deadline.

On that date the government is expected to lack the necessary funds to pay its bills.  This is not uncommon.  Normally, the government will allow itself to create more money with the click of the mouse and pay its debts.  If the government is unable to go further into debt, however, this will not be possible.

Obviously, the government will still be able to pay most of its bills (and many theorists argue that the government could pay all of its bills even until around November 1 using creative accounting), but without an increase in the debt ceiling, the government will certainly be unable to pay some of its debts.  People have theorized which bills will get prioritized in such a default scenario, but most politicians believe any unpaid bills is an unacceptable proposition.  How will this problem get solved?

In the short term, the government clearly needs to increase its debt ceiling, and in the long term, it will likely have to make many difficult choices.  Presumably, these long-term debt solutions will need to have a combination of reductions in spending and increases in taxes.  Such a long-term solution, which has been coined the "Grand Bargain" is at this point an afterthought.

In my opinion, however, the whole concept of the debt ceiling should be up for debate.  The United States is one of the only countries in the world (Denmark is another) to hold itself to a debt ceiling.  Other countries simply borrow as much as they need in order to cover the already-approved spending.  This idea is the concept I use for this free current events lesson.  Students will get to debate whether a debt ceiling should or should not be in place.

The first video gives general background on the debt ceiling and its characteristics.  The second video, which aired on October 13 on ABC News, explains the current political situation.  Both videos are included here and in the free download.

  • Taxing and Spending clause of the constitution (gives Congress, not the president, the power to tax and pay debts)
  • The political power and role of special interest groups (particularly the Tea Party)
  • The concept of gerrymandering (some theorists argue that several House Republicans are only able to hold out on the debt ceiling because they are in such stable districts that they could never get voted out)
  • Credit Ratings (people may be less likely to loan money to the U.S. if it defaults on its loans)
  • Interest rates in financial markets (interest rates for borrowing money will certainly rise if the U.S. defaults because loaning money will become riskier)

I hope you and your class find this lesson engaging and invigorating.  Please leave me any questions or comments.  Enjoy!