Do We Really Need The Debt Limit?
According to most analysts, the U.S. government could breach its federal debt limit at some point late next summer. Of course, members of Congress can keep that breach from happening by raising or suspending the debt ceiling and allowing the U.S. Department of the Treasury to borrow more money.
Federal lawmakers can bring up a vote to raise the debt limit any time they want, and, depending on the legislative process they use, could need only a bare majority vote in both the U.S. Senate and the U.S. House for approval.
Currently, Congress is not divided. Democrats enjoy majorities, slim though they may be, in both chambers, and they control the White House. They might not have this luxury after the November 8 congressional midterm elections, and Republicans have historically demanded significant spending cuts in exchange for even scheduling votes to lift or suspend the debt limit – something Democrats say is a non-starter.
So, will Democrats bring up a debt limit vote before the end of Congress’s current term? Or will they wait and punt the issue to next year’s House and Senate, which could be controlled by the GOP?
That question is not yet consuming the daily headlines … but it should be.
Why? Let’s take a look.
What Is the U.S. Debt Limit, and How Old Is It?
The federal debt limit does not actually authorize spending. A vote to increase it is not a vote for future budget authorization levels or funding. Instead, increasing the debt limit is like agreeing to pay back your credit card – the transaction has already been approved, now it’s time to pay for it.
The U.S. House Committee on the Budget explains it this way: “The debt ceiling does not constrain federal spending or the amount we need to borrow; it simply restricts the Treasury Department’s ability to honor financial commitments previously made by Congress and the President.”
Brookings Institution scholar Dr. Louise Sheiner has said frankly, “if you look at the history of the debt ceiling, you will find that it has not had any material effect on deficits.”
So, does that mean the debt limit serves no real budgetary purpose, while potentially posing very real economic risk?
Kind of. Democrats on the House Budget Committee have pointed out that, “As the only major industrialized nation with a debt limit, the United States is also the only major economy that routinely puts itself at risk of defaulting on our own debt and manifesting a self-inflicted economic collapse.”
Writing recently in New York Magazine, political pundit Jonathan Chait argued, “The debt ceiling is a completely superfluous and mostly accidental feature of the American political and economic system.”
It’s hard to disagree. Consider the history of the debt limit.
As the Bipartisan Policy Center explained, until World War I, Congress exacted full control over federal borrowing. Lawmakers authorized each and every debt issuance and specified the instruments and parameters under which the Treasury Department could borrow money.
With borrowing rising rapidly because of the war, there had to be a better way. That’s when Congress approved the Second Liberty Bond Act of 1917, which gave the Treasury Department “much more flexibility in managing federal finances by not restricting the purpose for which new debt was issued.”
Nearly a quarter of a century later, in the midst of the Great Depression, Congress went even further. In 1939, federal lawmakers consolidated limits on specific forms of debt into one aggregate debt limit. It set the limit at $45 billion (how quaint!) and gave the Treasury Department “wide discretion over what borrowing instruments to use so long as total debt does not exceed that level.”
At that point, Congress could raise the limit when it wanted, or whenever it was needed, and it has raised or suspended the debt limit about 100 times since it was instituted.
A Low-Drama Vote
For most of the history of the debt ceiling, raising the debt limit prompted no drama.
Earlier this year, the Congressional Research Service examined debt limit increase or suspension votes since 1978. That year, the measure was approved by the Senate on a voice vote. (Voice votes are cast when the issue at hand is noncontroversial and no senator opposes the vote.) That happened again in 1981 — twice — when there was divided government in Washington, and it happened again in 1983.
As The New York Times has explained, raising the limit “used to be a bipartisan nonevent.”
According to The Times, that changed in 2006, when Democrats, including then-Senator Joe Biden, “refused to support a debt-limit increase by the George W. Bush administration and the Republican majority in Congress, as a protest over the Iraq war and tax cuts.”
Then, as readers might recall, in 2011 and 2013, “the Republicans tried to use their potential support as a bargaining chip, to force the Democrats and [President] Barack Obama to concede on spending cuts.”
Since then, attempts to raise the debt limit have been fraught with partisanship and brinkmanship, frequently (and needlessly) bringing the U.S. to the brink of default. As it did in 1917, is it now time for Congress to consider a better path forward?
The Consequences of Not Raising the Debt Ceiling
No lawmaker relishes taking a vote to raise the debt limit. If they agree to increase the amount that the federal government can borrow, their political opponents may argue the vote resulted in wasteful spending and a higher federal deficit — even though, we have covered, the debt limit does not actually authorize spending. Regardless, going into an election, that’s a claim with which no candidate wants to be saddled.
While wasteful spending and high federal deficits are no joke (and may be tied to rising inflation, another Election 2022 boogeyman), breaching the debt limit would be much more gruesome.
Here is what would happen:
Since the federal government can longer borrow funds, it will run out of money. That means the government might have trouble cutting checks for things like Social Security and veterans’ benefits, among other critical public programs.
Running out of money also would mean the United States could default on outstanding loans, which would most likely cause the country’s credit rating to fall and a global flight away from U.S. bonds.
Think the stock market has been rocky so far this year? The U.S. economy and its markets, along with international financial markets, would probably take a huge hit if the U.S. government defaults on its obligations.
Of course, all of this is hypothetical since the U.S. government has never intentionally defaulted on its debt. (There have been a handful of incidents over the last 250 years during which the government refused to pay certain relatively small debts.)
According to CNBC, during the congressional standoff on the debt limit in 2011, which was arguably the closest moment the United States ever came to default, the country’s credit rating was downgraded and there was significant market volatility. Specifically, between July and October of 2011, the S&P 500 fell more than 18 percent.
A 2021 report by Moody’s Analytics found that if the federal government defaulted on its debt, it would result in six million lost U.S. jobs, would lead to a one-third decline in the stock market, and would cut U.S. household wealth by $15 trillion. All this at a time when the U.S. and global economies are rife with inflation and the threat of recession is rampant.
Options to Get Rid of the Federal Debt Limit
All of this begs the question: why not simply eliminate the need for Congress to vote on raising the debt limit altogether? According to CNBC reporter Thomas Franck, getting rid of the debt limit has bipartisan support.
Or at least it did.
Franck has reported, “Ten years ago, [Senate GOP leader Mitch] McConnell floated the idea of giving the president the responsibility of lifting the borrowing cap subject to congressional review. [More recently, Treasury Secretary Janet] Yellen told the House that she would support a bill erasing the ceiling outright or granting the Treasury secretary power to reset it from time to time.”
Specifically, back during the debt limit standoff of 2011, then-Senate Majority Leader McConnell floated a plan to grant the Treasury Department new borrowing authority unless Congress passed legislation to deny that authority. In practice, this would have avoided the need for Congress to affirmatively vote to allow Treasury to borrow more money every few years.
In the current Congress, Sens. Chris Van Hollen (D-Md.), Brian Schatz (D-Hawaii), and Michael Bennet (D-Colo.) have introduced legislation that would eliminate the debt ceiling. House Budget Committee Vice Chair Brendan Boyle (D-Penn.) and committee Chair John Yarmuth (D-Ky.) have offered a bill take the responsibility of raising the debt limit away from Congress and give it to the Treasury Department.
“Paying our debts should be an automatic act, not a politicized weapon used for leverage,” Sen. Schatz said.
But legislation to abolish the debt limit would require 60 votes to pass the Senate. In a closely divided chamber, and with no Republicans who seem keen to support giving the current administration more authority over the economy, that means that these bills are unlikely to see the light of day anytime soon.
In the short term, there are other solutions. Democrats are in control of both chambers of Congress and the White House and could bring up a measure to raise the debt limit at any time before the election, or in the lame duck Congress.
It’s unlikely. Republicans surely would make a political issue out of it, even though they potentially could not stop the legislation. And breaching the limit still is far off — at least in Washington terms — and some members of the Democratic party may not be inclined to suffer Republicans’ scorn if the GOP will be at least partly in power next year. Why not make Republicans deal with it?
And so, the country waits, along with the global economy.