What the Heck is the Debt Ceiling?

The debt ceiling is an arbitrary limit set by Congress on the Treasury to assume new debt to cover spending that has already been approved and appropriated through the federal budget process.

History of the debt ceiling

According to the Constitution, Article 1 Section 8, only Congress can authorize the borrowing of money on the credit of the United States. From the founding of the Republic until WWI Congress approved each individual debt incurred by the U.S. government separately. In order to give the executive branch more flexibility to finance the government during that massive war effort Congress passed the Second Liberty Bond Act of 1917, which established an aggregate debt limit beyond which Congressional approval was required.

Periodically the government reaches its debt limit and the Treasury notifies Congress of the potential for default- Treasury not being able to pay U.S. debt obligations. At that point the Treasury is authorized to pursue ‘extraordinary measures’ to buy the government time until Congress can raise the limit. ‘Extraordinary Measures’ involve the manipulation of existing federal obligations, like investment in federal employees pension funds and conversion of government bonds, to keep within the debt limit while preventing a government shutdown.

The debt ceiling has been raised 74 times since March 1962, including 18 times under Pres. Ronald Reagan, eight times under Pres. Bill Clinton, seven times under Pres. George W. Bush, and five times under Pres. Barack Obama.

Only once has the government actually shut down in recent memory, during the budget fight between then-Pres. Bill Clinton and the Republican-led Congress over the 1996 federal budget. The federal government was shut down for a total of 27 days between Nov 14, 1995 and Jan 6, 1996.

Why does the debt ceiling matter?

For fiscal conservatives, Congressional ability to keep the federal government from accumulating an unsustainable amount of debt is an essential aspect of Congressional oversight and the inherent checks and balances of the federal government.

There is disagreement, however, about the current usefulness of the debt ceiling to control government spending. Some argue that after the institution of the Budget and Impoundment Control Act of 1974, which strengthened and centralized Congress’ budget authority, the debt ceiling became an ineffective tool. Prior to that point the President could withhold funds appropriated by Congress (impoundment) in order to control government debt. After that point, though the president proposes a budget, Congress approves it, so there are fewer checks and balances in the spending process. Now the debt ceiling is a way for Congress to regulate itself, though it is portrayed as a control on spending by the executive branch. Given the gridlock of the modern Congress the system is challenging at best.

Regardless of the effectiveness of the current debt ceiling system, the effects of the debates around it and looming possibilities of default have significant effects on world markets and the financial lives of individual citizens. According to the Annual Report issued by data website, USAFacts.org failure to raise the debt limit creates operational and economic risk:

"Failure to raise the ceiling when needed could prompt an unprecedented default on Treasury securities, which are generally considered the world’s safest government debt and form a foundation for the global financial system. A US default, in turn, could trigger a financial crisis and throw the nation into a recession."

When, during 2011 and 2013, Congress and then-Pres. Obama, were locked in an extended fight over the debt ceiling the Government Accountability Office, estimated that the mere threat that the debt ceiling might not go up cost taxpayers $1.3 billion in higher borrowing costs in the 2011 fiscal year, and tens of millions of dollars in 2013 too. U.S. credit was downgraded for the first time ever, affecting the government’s borrowing power and the interest rates it pays on existing debt.

Should Congress raise the debt ceiling or consider a new system for controlling government debt altogether? Use the ‘Take Action’ button to tell you reps what you think!

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— Asha Sanaker

(Photo credit: Blue Diamond Gallery / Creative Commons)