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The federal government often runs up larger deficits during times of war, recession and national emergencies such as the recent pandemic. But as the baby boom generation has retired, the government increasingly has borrowed money to make expected payments to old-age programs such as Social Security and Medicare.
The debt thus represents past spending, just like purchases on a credit card. You can’t just rip up the bill and ignore it, even if you try to restrain your future spending.
Why does the United States have a debt limit?
In the early decades of the republic and through the 19th century, Congress preferred to issue debt for specific purposes, such as issuing bonds to build the Panama Canal. But World War I was a conflict with unknowable costs, making targeted legislation difficult. At first Congress established a $5 billion limit on new issues of bonds, along with the immediate issuance of $2 billion in one-year certificates of indebtedness, in the First Liberty Loan Act of 1917.
But very quickly another law was needed — the Second Liberty Loan Act of 1917 — in which Congress set a general limit on borrowing: $9.5 billion in Treasury bonds and $4 billion in one-year certificates. This freed the treasury secretary to begin to figure out the best mix of securities to issue, without nearly as much congressional oversight as before, according to a 1954 history of the debt limit, published in the Journal of Finance, by H.J. Cooke and M. Katzen.
For two decades, future increases in the national debt were simply amendments to the Second Liberty Bond Act. But it was not until 1939 — during the Great Depression and on the eve of World War II — that Congress eliminated all the different limits on types of bonds, thus creating an overall aggregate limit on the amount of money the U.S. government is authorized to borrow to meet existing obligations. That law is the basis for the debt limit today, currently set for $31.381 trillion.
Do other countries have debt ceilings?
Yes, though Denmark is the only other country in the world that has a debt ceiling limited to an absolute amount, according to the Government Accountability Office. (The debt limit in Denmark is kept high enough so it never gets breached.) Many countries limit debt to a percentage of the gross domestic product (GDP), the broadest measure of the economy. For instance, as part of the Maastricht Treaty of 1992, European Union member states pledged to not allow debt to increase above 60 percent of GDP, though some have exceeded that level from time to time.
U.S. debt held by the public was about 97 percent of GDP at the end of 2022, according to the Congressional Budget Office. Including intergovernmental bonds held by Social Security, Medicare and other programs, total U.S. debt is nearly 125 percent of GDP, according to the Treasury Department.
What’s a ‘clean’ increase in the debt limit?
President Biden has pushed for an increase or suspension of the debt limit without any conditions attached. House Republicans have said they will not agree without Biden signing on to a plan that calls for significant rollbacks of federal discretionary spending and a dismantling of major laws that Biden considers part of his legacy. Both sides appear to have ruled out any changes to Social Security or Medicare, even though these programs will account for a significant amount of future deficit spending.
By a vote of 217-215, House Republicans narrowly passed a bill that would raise the debt ceiling while returning discretionary spending in fiscal year 2024 to 2022 levels and allowing 1 percent annual growth for the rest of the decade — in effect nearly an 18 percent reduction from anticipated 2024 spending. Republicans punted on identifying which programs would be cut and suggested this bill was an opening bid to bring Biden to the negotiating table. (The House legislation has no hope of passage in the Democratic-controlled Senate.) Biden consistently says he wants to haggle over the 2024 federal budget without a link to the debt ceiling.
Biden’s stance is pushing against the tide of history. Within 15 years of the debt ceiling being established in 1939, members of Congress began to use the must-pass debt ceiling increase as leverage to force concessions from the executive branch, according to a 1993 study of the politics of the debt limit by Linda K. Kowalcky and Lance T. LeLoup in Public Administration Review.
In 1953, Republicans blocked an increase requested by President Dwight D. Eisenhower, also a Republican. The next year, with Democrats in control of the Senate, Harry F. Byrd of Virginia, who then chaired the Senate Finance Committee, was concerned that Eisenhower’s goal of building a national highway system would add to the debt accumulated during World War II. Eisenhower asserted that he had “moved promptly and vigorously” to cut spending but still needed the debt limit raised to pay outstanding bills. Byrd was not satisfied. He demanded more cuts in exchange for a scaled-back debt-limit increase that Eisenhower finally obtained from Congress.
In the 1970s, lawmakers — primarily Democrats — began to offer amendments to the debt ceiling that had little to do with government finances, including suspending U.S. bombing in Cambodia or bolstering Social Security, the study said. A pattern soon developed, with lawmakers in each party generally supporting a debt ceiling increase only if the president was from the same party.
In 2006, Sen. Barack Obama (D-Ill.) gave a speech on the Senate floor, saying he would refuse to approve a debt-limit increase requested by a Republican president, George W. Bush, without a plan to reduce the budget deficit. Five years later, as a president demanding Congress raise the debt limit without conditions, Obama admitted to “making what is a political vote, as opposed to doing what was important for the country.”
Is there a way to end this impasse?
Biden has indicated he will meet next week with House Speaker Kevin McCarthy (R-Calif.) and other congressional leaders. A face-saving approach would be to kick the question of future spending reductions to a bipartisan commission, though there appears to be little appetite for that on either side.
McCarthy has suggested he wants a return of the across-the-board discretionary spending caps that the GOP-led House and Obama established as a way to end the 2011 debt-ceiling fight, a deal known as the Budget Control Act. That helped keep spending in check for about seven years — though Congress almost every year voted to exempt itself from the full caps, according to the Congressional Research Service. Then, in fiscal 2018, Republicans controlled the White House, the House and the Senate. They decided to blow through the bipartisan spending caps set in 2011 — and boosted discretionary spending by 16 percent.
While Biden says he is vehemently opposed to the House bill, he could agree to enough spending reductions that McCarthy would have something to take back to his caucus. But another hurdle is the GOP demand that some of Biden’s signature achievements — such as the environmental spending and bolstered Internal Revenue Service that were part of the Inflation Reduction Act — be repealed. That’s a dealbreaker for Biden — yet a critical talking point for many House Republicans.
What happens if the two sides don’t reach an agreement?
The United States would be in uncharted waters. The debt ceiling was technically reached on Jan. 19 but the Treasury has used special budgetary maneuvers to conserve cash and buy time for negotiations. But those tactics will run their course perhaps as early as June 1, meaning the Treasury in theory will no longer be able to pay interest to bondholders. That would be considered a default and could cause economic turmoil around the globe. U.S. Treasurys generally have been considered among the safest investments in the world, though the 2011 debt-ceiling fight led Standard & Poor’s to downgrade U.S. debt for the first time.
Some legal experts say Biden might have other options, though White House officials have not officially indicated he would consider these steps if Congress fails to act.
First, Biden could declare that the debt ceiling, rooted in a law passed 84 years ago, to be in conflict with more recent laws requiring the executive branch to spend money appropriated by Congress. This likely would toss the issue to the courts to sort out, a process that could take years, and the markets might shrug off the impasse as typical Washington nonsense. (Recall that House Democrats sued President Donald Trump after he seized $8 billion in 2019 from other programs to build a southern border barrier despite Congress refusing to appropriate the money. The legal wrangling didn’t stop Trump from tapping the funds. The case was deemed moot by the Supreme Court after Trump lost the election and Biden halted construction.)
But it’s likely that without a quick resolution, investors would demand higher interest rates for new bonds issued by the Treasury, given the legal uncertainty associated with them and possible additional downgrades by debt-rating agencies. The 2011 debt-ceiling fight led to an increase in Treasury’s borrowing costs of about $1.3 billion in just fiscal year 2011, according to the GAO. A technical default would increase borrowing costs even more.
Second, Biden could ignore the debt limit by invoking the 14th Amendment to the Constitution, which states in one section that “the validity of the public debt of the United States, authorized by law … shall not be questioned.” Ratification of the 14th Amendment was a requirement for Confederate states to reenter the Union. The provision was intended to make sure Confederate states did not balk at paying for debt incurred during the Civil War — much of it held by small investors in the North, not financial institutions. But some experts say it could also trump the debt ceiling.
Interestingly, the Supreme Court has interpreted this clause only once in a controlling opinion — during an earlier instance of the United States defaulting on obligations to bondholders.
When Franklin D. Roosevelt became president during the Great Depression, U.S. bonds — some of which had been issued to finance World War I — included a clause that promised holders they could be repaid in gold coin. But Roosevelt wanted to depreciate the value of the dollar relative to gold — by more than 50 percent — so at the urging of the administration, Congress in 1933 passed a joint resolution canceling all the gold clauses.
Holders of the bonds thus were denied an instant windfall. Congress in essence repudiated the government’s obligations, saying it conflicted with Congress’s power to regulate the value of money, and bondholders were left with depreciated paper money. In other words, the United States defaulted. Bondholders sued and it took two years for the Supreme Court to settle the matter.
In 1935, in Perry v. United States, Chief Justice Charles Evans Hughes wrote a 5-4 opinion that cited the 14th Amendment’s clause on the debt as part of the court’s reasoning that Congress’s action was unconstitutional.
“We regard it as confirmatory of a fundamental principle which applies as well to the government bonds in question, and to others duly authorized by the Congress, as to those issued before the amendment was adopted,” Hughes wrote. “Nor can we perceive any reason for not considering the expression ‘the validity of the public debt’ as embracing whatever concerns the integrity of the public obligations.”
Hughes’s opinion, however, also held that bondholders were entitled to no damages — a split-the-baby outcome that Indiana University law professor Gerard N. Magliocca concluded was the result of Roosevelt making clear he was prepared to take the extraordinary step of ignoring the court’s ruling if the administration lost the case.
The Congressional Research Service, in a 2021 report, said that the limited court scrutiny of the 14th Amendment’s public-debt clause makes it unclear how it might apply in a dispute over the debt limit. Nonpayment of Treasury bond interest “would not resemble the congressional action that confronted the Court in Perry, an express abrogation of the government’s gold clause obligations,” CRS said.
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