The fight against the debt ceiling puts the American economy at risk

A political fight puts the economy at risk again.

The US government yesterday hit the legal limit on how much it can borrow, raising fears that the country will soon be unable to pay its bills.

Fighting over the debt ceiling, which is now over $31 trillion, may seem technical, but it could affect everyone. If the United States does not repay its debts, it could send financial markets flying. Your 401(k) and other investments may follow. As the flow of money dries up, businesses could be forced to close or downsize, taking jobs with them.

“Although no one really know what would happen if you broke debt limits, few people would think good things would happen after that,” Christopher Campbell, a former Treasury official, told my colleagues Jim Tankersley and Alan Rappeport. "It's a cascade of the seriousness of the situation."

It's a grim scenario, which the country has flirted with repeatedly since the 1990s.

The good news: the government has time to act. Analysts believe the Treasury Department can use so-called extraordinary measures to avoid a default until the summer, giving Congress the next few months to pass a bill increasing the debt ceiling.

The bad news: Democrats and Republicans are divided. House Republicans say they want to use an increase in the debt ceiling — and the threat of default — as leverage to cut government spending. Top Democrats have likened the Republican position to a hostage situation. The parties can't even agree on whether to negotiate.

Today's newsletter will explain the debt limit and how it became a constant source of near-crisis in the United States.

There is a lot of confusion around the debt limit, largely because it is so strange. But it's relatively simple.

Congress routinely passes government spending bills. Since this legislation generally spends more money than it brings in, it adds to the debt.

In most countries, that would be the end of the spending process, and the government would simply take on more debt. After all, Congress effectively says it's prepared to increase debt when it passes spending bills that do just that. If Congress wanted to cut spending, these bills seem like the most logical route to addressing those concerns.

But the United States has an extra step in the process: a debt limit set by Congress. This caps the amount of money the United States can borrow, which is essentially a spending cap. ("Debt ceiling" is another term often used to refer to the limit set by Congress.) If the United States does not meet the debt limit, it cannot borrow any more money and must default on their existing debts. (Denmark is the only other country with a similar debt ceiling, although it raises its ceiling long before it gets close.)

During the major part of the century's existence, the increases were largely unchallenged.

But that has changed over the past three decades. Republicans, in particular, have used the passage of bills increasing the limit as leverage to try to force spending cuts on Democratic administrations. Democrats, too, have used it as a political tool: In 2006, then-Senator Joe Biden joined his fellow Democrats in opposing an increase in the debt ceiling to protest the cost of debt cuts. taxes and the war in Iraq.

A crucial ingredient of this tightrope policy is a divided government. Raising the debt ceiling is less of a problem when the same party holds power in both houses of Congress and in the White House. But when the government is divided, it makes possible the current scenario: A Republican-controlled House threatens to freeze a debt...