'This is not a game,' BU economist explains why raising debt ceiling is so crucial
BOSTON - When it comes to politics, it's not always simple to explain. President Joe Biden met this week with the four top members of Congress to discuss the impending deadline on whether or not to raise the debt ceiling of the United States. Some people may be asking, what is the debt ceiling? How does it impact me?
During the opening remarks of the discussion, President Biden made it sound so easy.
"We are going to get started and solve all the world's problems," laughed President Biden.
Understanding the debt ceiling is not quite that quick. Laurence Kotlikoff is an economist at Boston University. He sums it up best.
Read: What would the government not paying its bills mean for the economy?
"Officially debt represents money that is borrowed from Americans and foreigners, and when you borrow you have to repay with interest," says Kotlikoff. "When we borrow, we don't tax current adults, instead we accumulate an obligation to pay back the borrowing. That obligation is left for our kids to pay."
If politicians can't come to an agreement by June 1, the country will default, or in other words decide not to pay their debts. Kotlikoff says the US has done this before when the country went off the gold standard and wouldn't pay debts in gold.
"That happened when people were happy to take the dollars over the gold. They won't be happy now getting nothing," said Kotlikoff.
So, what will happen to average Americans if the country defaults?
"What is likely to happen is we will default not on bond holders, but on Social Security recipients and Medicare recipients, and say, 'Sorry your checks aren't coming," believes Kotlikoff.
After that, he says the stock market will crash, and the value of the dollar will crash.
"Then it will likely come back, but expect permanent damage, this is not a game," warns Kotlikoff.
He believes the US hasn't raised taxes or cut spending to create a policy that is sustainable. Republicans have been demanding spending cuts to raise the debt limit, and the GOP led house passed a debt ceiling bill that would freeze government spending to last year's levels. The Biden administration argues those cuts would greatly hamper funding to some schools.
"Moderate Republicans are going to have to see some pain in the country in order for them to come over and work with Democrats to pass a bill," said Kotlikoff.
The question now becomes, who will be fitting the bill for the pain?