The Debt Ceiling: America’s Ticking Fiscal Time Bomb

Introduction

Last January, the US national debt surpassed $34 trillion (https://www.pbs.org/newshour/politics/u-s-national-debt-hits-record-34-trillion-as-congress-gears-up-for-funding-fight). Soon it will hit $35 trillion, and a recent CBO estimate projected that in 10 years it will have hit $50 trillion, with no reversal in sight (https://www.washingtonpost.com/business/2024/06/18/national-debt-budget-projections-cbo/). These figures were brought up throughout this winter and spring’s budget negotiations, as Congress narrowly avoided a government shutdown. But while the appropriations process is one venue in which concern for the debt can lead to an economically costly impasse, there is actually another process which opens up the possibility of a debt-induced standoff. And while a shutdown is inconvenient in the moment, failure on this second front could result in a financial crisis worse than the stock market crash of 1929.

A bank run in 1929. The financial crisis triggered by a default could be even worse. https://en.wikipedia.org/wiki/Bank_run

What is the Debt Limit?

The United States debt limit is a statutory limit on how large our national debt can grow, or how much money the Treasury is allowed to borrow. If the US debt ceiling is surpassed, the Treasury would not be allowed to borrow any more money, and the federal government would no longer be able to fulfill its spending obligations (https://www.brookings.edu/articles/the-hutchins-center-explains-the-debt-limit/). This is called default, and it would cause numerous problems. First, with federal spending halted, the United States would enter economic freefall. State and local governments would lose federal aid, causing massive cuts to basic public services. Industries that receive federal subsidies, such as the farm industry, would lose their support. Enforcement of environmental and labor regulations would cease. And people who rely on programs like medicare, medicaid, SNAP, social security, or the VA would lose their benefits, causing severe hardship for some of the most vulnerable citizens.

Air traffic control is just one of the vital federal expenditures which could be axed under a default https://www.washingtonpost.com/dc-md-va/2023/03/04/dulles-airport-radome/

But there are even more dire consequences. The global financial system operates on the US Dollar, which is seen as a stable currency. If the Treasury can no longer make payments, the value of the Dollar would collapse (https://www.cfr.org/backgrounder/what-happens-when-us-hits-its-debt-ceiling#:~:text=As%20of%20June%202023%2C%20the,spend%20money%20are%20legislated%20separately.), affecting not just the American economy, but the global economy as well. As President Obama explained in 2013, “As reckless as a government shutdown is…an economic shutdown that results from default would be dramatically worse…And the United States is the center of the world economy. So if we screw up, everybody gets screwed up.” (https://www.politico.com/gallery/2013/10/debt-ceiling-fight-20-great-quotes-001207?slide=0)

A White House analysis of the potential job impacts of a default. https://www.whitehouse.gov/cea/written-materials/2023/05/03/debt-ceiling-scenarios/

History of the Debt Limit

Prior to 1917, there was no debt limit. Instead, Congress gave the treasury specific authorization to take on debt whenever it became necessary. However, when the United States entered World War I, the government suddenly had to cover a new unspecified but very large expense. Instead of authorizing another round of debt at a set figure, Congress gave the Treasury authorization to issue unlimited bonds up to a certain value: that value was the first debt limit (https://www.brookings.edu/articles/the-hutchins-center-explains-the-debt-limit/). Since then, as the size of the federal government has grown, Congress has had to periodically raise the debt limit to avoid default. Oftentimes one party, or one member, would grandstand about the implications of authorizing more debt, and vulnerable members who voted to raise the debt ceiling would be attacked for their votes when they ran for reelection. But since everyone in Congress knew what default would mean, they never really risked failing to raise the debt ceiling. That changed in 2011, when Republicans took unprecedented steps to try and force policy concessions from President Obama.

A graph showing the rise of the debt ceiling and the national debt https://www.weforum.org/agenda/2023/05/america-debt-ceiling-rise-charts/

Recent Debt Limit Fights

Riding high on the Tea Party wave of 2011, Republicans took control of the House of Representatives with one goal; to force spending cuts out of Barack Obama by any means necessary. And with the debt fast approaching its limit, they had leverage. The new right wing House majority announced that it would not allow any increase to the debt limit without simultaneous deficit reduction, turning what had once been a side show in Congress’ partisan circus into a crisis of governance. During this fight, Republicans often tried to pin responsibility for a potential shutdown on Democrats. For example, Speaker John Boehner was quoted saying “The votes are not in the House to pass a clean debt limit, and the president is risking default by not having a conversation with us.” (https://www.politico.com/gallery/2013/10/debt-ceiling-fight-20-great-quotes-001207?slide=2). And their tactics worked; the final deal raised the debt limit by $2.1 trillion while at the same time reducing the deficit by $900 billion. The bill, known as the Budget Control Act, also established a commission to make recommendations for further deficit reduction (https://democrats-budget.house.gov/committee-report/summary-budget-control-act-2011). But the standoff was not without consequences; global markets panicked, the US had its credit rating downgraded, and observers understood that with debt limit hostage taking proven a viable method of extracting policy concessions from a hostile President, more crises were likely on the way (https://www.reuters.com/markets/us/us-debt-ceiling-markets-gauging-fallout-2023-02-16/).

The debt limit was raised in 2013 as part of a wider package addressing multiple fiscal concerns, under President Trump on multiple occasions, and under unified Democratic government in 2021, all with little incident. However, after Republicans took the House in 2022, they returned to the playbook from 2011 announcing again that they would try and extract concessions from President Biden before agreeing to a debt ceiling increase. Eventually, Congress reached an agreement which capped discretionary spending in 2024 and 2025 at current levels while suspending the debt ceiling until early 2025 (https://www.politico.com/news/2023/05/28/6-pillars-of-the-debt-ceiling-deal-00099108). But again, this was not without consequence, as the US’ credit rating was placed under review for potential downgrade (https://www.cnbc.com/2023/05/06/scope-ratings-places-us-credit-ratings-under-review-for-possible-downgrade.html). And while its true that Republican debt limit gambits have not yet led to default, government by manufactured crisis is a very dangerous proposition, and the consequences are only hypothetical until they aren’t.

Joe Biden and Kevin McCarthy, who worked out the most recent debt limit deal. https://www.nytimes.com/2023/06/03/us/politics/biden-debt-bill.html#:~:text=President%20Biden%20signed%20the%20Fiscal,on%20spending%20for%20two%20years.

Future of the Debt Limit

After the debt limit comes into effect again next January, Congress will have just a couple months to work out a new deal. The results of this November’s elections will set the playing field for how the next debt ceiling increase will be negotiated. But regardless, there are a few ways that the issue of the debt limit could be put to bed for good.

The first and simplest solution is for Congress to make the debt limit obsolete by either raising it to a number so large it will never be reached, or by abolishing it altogether. This option has been growing in popularity over the last couple of years as members of Congress and policy experts have begun to realize the destructive potential of debt ceiling hostage-taking. For example, Senator Brian Schatz has said “I just always thought this was the stupidest thing we do, and we do a fair number of stupid things,” and said he wanted to “stop these attempts to govern through threats.” However, many members of Congress want to keep the debt ceiling in place precisely so they can use it as leverage, making this option a difficult lift legislatively. But there is another way of nullifying this problem which only requires action from the President.

The 14th Amendment is known primarily for its equal protection clause, which has been used as the basis for numerous Supreme Court decisions expanding Civil Rights. But it’s less often cited fourth clause is especially relevant to the debt limit debate, as it states that, “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.” (https://www.law.cornell.edu/constitution/amendmentxiv). While originally intended to ensure that pensions owed to Civil War veterans would be honored, some legal scholars have interpreted it to mean that spending obligations incurred by Congress are constitutionally required to be met (https://www.investopedia.com/14th-amendment-and-its-role-in-the-debt-ceiling-debate-7724689). If the Executive Branch chose to embrace this argument, the President could order the Treasury to continue taking on debt on the grounds that the Constitution supersedes the statutory debt limit. This would be subject to litigation, and cause major controversy, making it less desirable than a legislative increase. But it exists as an emergency option for President’s otherwise unable to negotiate an raise. The future of the debt ceiling is uncertain, but if recent events are any guide, it will not be uneventful.

Summary:

Not many people know about the United States debt limit. But even though it flies under the radar, this obscure US fiscal law threatens every few years to bring the world economy to its knees.

Further Reading:

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The Debt Ceiling: America’s Ticking Fiscal Time Bomb

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