27 October 2023
It’s a time-honored American tradition; every year, millions of Americans gather to discuss and evaluate the possible outcomes. No, it’s not March Madness, the Super Bowl, or the Grammys. Instead, it’s America’s favorite political tradition: the debt ceiling crisis. Nearly every year, Congress encroaches upon its self-imposed spending limit, prompting epic political haggling before ultimately raising the debt ceiling. If this seems like it happens with frightening regularity, that’s because it does. Congress has increased the ceiling 78 times since 1960 and, since 2013, has suspended the debt ceiling eight additional times (1).
The debt ceiling, ostensibly meant to impose fiscal discipline on Congress, has been an abject failure in that regard. Additionally, while the debt ceiling crisis has been resolved every time failure seemed imminent, it is well known that interest rates would spike and the standing of the United States in the world economy would take a hit if Congress failed to raise the ceiling. There is no need to tempt fate and even risk that catastrophic possibility. Finally, eliminating the debt ceiling would streamline the budget process and allow Congress to directly address long-term economic problems. Currently, all the debt ceiling does is undermine the world’s safest asset (U.S. treasury bonds) and undercut public confidence in our institutions and government. All of this reiterates that there is no point in this charade and that eliminating the debt ceiling would allow the government to focus on more important things.
Before we go further, I should clarify what the debt ceiling is. The debt ceiling is “a legal limit on the total amount of outstanding federal debt” (2). When the U.S. hits that limit on its spending, the Treasury Department can no longer increase net borrowing and can only make obligatory payments such as Social Security. The debt limit does not govern the allocation of capital, but it can prevent the federal government from fulfilling previously existing obligations. Normally, the debt ceiling would just be a nuisance, a quirk of the American government like so many obscure elements, but recently, it has become a political weapon used to score political points and extract concessions by holding the U.S. economy hostage. It’s an incredibly irresponsible way of making deals, as even the threat that the U.S. government may fail to honor its debt obligations could cause the credit agencies to downgrade the American government. It also causes incredible stress for the citizenry, including federal employees, Social Security recipients, and government contractors. The debt ceiling was created around the time of World War One. Prior to this, each time the Treasury Department wanted to borrow money it needed an act of Congress (3). The debt ceiling gives the Treasury Department autonomy to borrow as much as they want and distribute as they see fit, up to a certain annual amount.
As mentioned earlier, the possible consequences of defaulting on the debt ceiling would be catastrophic. First, the market for treasury bills would be disrupted. Due to their use as collateral worldwide, this would cause a cascading effect around the world. Second, there might be a run on money-market funds and possibly a run on banks as well. Treasury bills are often considered risk-free rates, and other rates (car loans, mortgages, student loans) adjust to that figure. If treasury bills are no longer risk-free, that could cause other borrowing costs to go up and raise overall expenses.
What makes this problem even more aggravating is that the debt limit has no actual bearing on the actual state of the economy. What I mean is that while defaulting would lead to financial losses, the debt ceiling has had no measurable success in its initial goal of growing the economy. It measures no legitimate economic value and ignores “trillions of dollars in assets held by the federal government” (4). It also has no relationship with any major economic stressor. The federal debt has risen by over $17 trillion in the last 25 years, yet debt service payments (required interest payments on debt) have shrunk from 3% of GDP to 1.8% (5). The debt ceiling doesn’t get adjusted for inflation, doesn’t consider other assets, and is basically a number picked out of a hat by Congress. It doesn’t even consider the proper type of debt as it measures gross debt, which includes debt the federal government owes itself. This is especially ridiculous when one considers social security. To prepare for retirement for the Baby Boomer generation, the government taxed workers more than needed for a number of years. They now plan to use that surplus to pay out social security. This makes sense and is good fiscal policy, yet the gross debt was inflated because of this, which means that it negatively affected the debt ceiling. Additionally, the government has “almost $2 trillion in student loans” as a financial asset that is completely disregarded by the debt ceiling (6). If the debt ceiling is meant to measure the assets and liabilities of the government and serve as a check between them, how can we ignore trillions of dollars in assets?
Additionally, the debt ceiling is a trigger for a massive economic crisis and a potential recession. The CBO forecasted a budget deficit of around 12% of GDP in 2021, with most of that being frontloaded at almost 16% for the first six months of the year (7). This forecast implies that the borrowing averaged around 8% of GDP for the second half of the year. Because this is the gap between tax revenues and spending, if the United States stopped borrowing, it is a measure of how much would need to be cut. An 8% cut in GDP would have been a massive shock to an economy still reeling after COVID. Thankfully, this didn’t happen, but the fact that it could have is ridiculous and almost completely pointless. Additionally, the negative ripples of such a cut would have a cascading effect, and the multiplier would cause even more economic damage.
There are possible solutions to dealing with the debt ceiling. The Fourteenth Amendment states that “the validity of the public debt of the United States… shall not be questioned” (8). This suggests that logically there is no way to truly default without being in violation of the Constitution. Common sense implies that we must abolish the debt ceiling through an act of Congress. It is impossible to revoke the authority of Congress to borrow money and set budgets (that power is in the Constitution), but Congress could pass an act that would allow for the debt ceiling to be automatically raised every year without the need for this political warfare. This would be a way to essentially abolish the debt ceiling in everything but name and could be a way around all these issues.
Another way to get rid of the debt ceiling if Congress won’t vote to abolish it is to raise it to a value Congress knowingly would not exceed. Under current budget reconciliation rules, the debt ceiling can only be raised, so if Congress raised it to some large value, that would solve the issue. Repeating this concept ad infinitum would solve the solution by creating a debt ceiling that, for all purposes, no longer exists.
Additionally, if Congress refuses to act, the Biden administration could take action. While one way would be political pressure, another way would be far more dramatic: the minting of a platinum trillion-dollar coin. As the thinking goes, the debt ceiling prevents the Treasury from selling more bonds and causes a financial shortage. To prevent this, the Treasury could simply mint a coin with a denomination of $1 trillion and deposit it in the Federal Reserve. That would increase the reserves enough to avoid the issue of the debt ceiling (9). If that sounds ridiculous and like something out of Family Guy or the Simpsons, that’s because it is. It’s an arcane, technical, farcical solution to a phony, pointless, accounting problem. There’s a reason no other nation has a statutory debt ceiling, and because of the existence of this, we have to solve an accounting problem annually. Any talk of printing a trillion-dollar coin immediately provokes mockery and ridicule, with critics suggesting increasingly large values (ten trillion, hundred trillion, or even 500 hundred trillion). However, if we wanted to abolish the debt ceiling (which would make sense), that is essentially equivalent to printing an infinite dollar coin. Minting the coin solves the ridiculous accounting constraint by raising the debt ceiling to some discrete value, but abolishing the debt ceiling essentially raises the limit to infinity. While this is technically legal, even its proponents agree that the solution is contrived at best and that a cleaner solution would be preferred.
My proposal is for a constitutional amendment that would eliminate the debt ceiling and repeal the Second Liberty Bond Act, which created the debt limit in 1917 (10). This amendment would also be in line with the 14th Amendment, which states that the U.S. must always pay its debts. The big issue with this is its Constitutional legality; such a case will end up in front of the Supreme Court, and it is unclear if they would take such a drastic step. Politically, my suggestion would be to tie the debt ceiling to the budget. Each year, the President and Congress have to pass a budget for the next fiscal year. Generally, when Congress votes to raise the debt ceiling, they raise it to an arbitrary number that is determined by the difference between the approved federal budget and the amount in the federal reserves plus some extra money for extra expenditures. Under my proposal, we would remove this from an act of Congress, which leaves it susceptible to political brinkmanship, and instead make this an automatic feature of the federal budget. Every year, once the budget is passed, the debt ceiling is automatically raised. The automatic increase would allow for fiscal responsibility (the ostensible point of the process) to be determined by the federal budget spending, and the debt ceiling would otherwise be forgotten. By doing this, the government will be able to focus on more important things.
The abolition of the debt ceiling is unlikely because of the immense political value it gives to members of the minority. It is a must-pass legislation, and it can lead to immense concessions to the minority party. This leads to negotiations that have increasingly gone down to the wire and left very little room for movement or error. This immense partisanship is a major issue in all facets of life and is more than just an economic problem. However, the debt ceiling is too dangerous and too important to play politics with. Congress should get rid of it and solve this issue, as it no longer prompts any sort of meaningful financial discussion. By eliminating this farce through either abolishing it, raising it to a large value, or printing a coin to deposit to the Federal Reserve, the government will finally be able to focus on more important issues.
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References
(1) Wendy Edelberg, Louise Sheiner, et al. “Why Congress Needs to Abolish the Debt Limit: Testimony before the House Budget Committee.” Brookings, 22 Feb. 2022. www.brookings.edu/articles/why-congress-needs-to-abolish-the-debt-limit-testimony-before-the-house-budget-committee/.
(2) Ibid.
(3) Martin, Michel. “An Economist’s Case for Abolishing the Debt Ceiling.” NPR, NPR, 21 Jan. 2023. www.npr.org/2023/01/21/1150605281/an-economists-case-for-abolishing-the-debt-ceiling.
(4) Bivens, Josh. “Abolish the Debt Ceiling before It Commits Austerity Again: The GOP Used the Debt Ceiling to Force Spending Cuts in 2011. It Can’t Be Allowed Again.” Economic Policy Institute, 2021. www.epi.org/blog/abolish-the-debt-ceiling-before-it-commits-austerity-again-the-gop-used-the-debt-ceiling-to-force-spending-cuts-in-2011-it-cant-be-allowed-again/.
(5) DeSilver, Drew. “5 Facts about the U.S. National Debt.” Pew Research Center, Pew Research Center, 14 Feb. 2023. www.pewresearch.org/short-reads/2023/02/14/facts-about-the-us-national-debt/.
(6) Boccia, Romina. “From Debt Ceiling Crisis to Debt Crisis.” Cato.Org, 2023. www.cato.org/blog/debt-ceiling-crisis-debt-crisis.
(7) “Monthly Budget Review: Summary for Fiscal Year 2021.” Congressional Budget Office, 2021. www.cbo.gov/publication/57539/html#:~:text=In%202021%2C%20the%20deficit%20was,from%204.7%20percent%20in%202019.
(8) Buiter, Willem H. “Eliminate the Debt Ceiling: By Willem H. Buiter.” Project Syndicate, 21 Feb. 2023. www.project-syndicate.org/commentary/debt-ceiling-defies-constitution-and-common-sense-by-willem-h-buiter-2023-01.
(9) Rubin, Robert E. “Get Rid of the Debt Ceiling Once and for All.” The Atlantic, Atlantic Media Company, 5 June 2023. www.theatlantic.com/ideas/archive/2023/06/eliminate-debt-ceiling-gdp/674279/.
(10) Greve, Joan. “Should Us Get Rid of Debt Ceiling Altogether? Lawmakers Consider It as Crisis Looms.” The Guardian, Guardian News and Media, 8 May 2023. www.theguardian.com/business/2023/may/08/debt-ceiling-us-biden-default.
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