The United States Treasury Department announced on January 19 that the government has reached its limit for the amount of money it is authorized to borrow.
According to Treasury Secretary Janet Yellen, extraordinary measures are being taken to ensure solvability and avoid the U.S. defaulting on its required payments. These actions will avoid default until June, but Congress needs to act.
As the U.S. Department of the Treasury explains: “The debt limit is the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments. The debt limit does not authorize new spending commitments. It simply allows the government to finance existing legal obligations that Congresses and presidents of both parties have made in the past.”
The debt limit, or debt ceiling, has a long and turbulent history. Article 1 Section 8 of the United States Constitution ensures that only Congress is authorized to borrow money on behalf of the nation.
Originally, Congress passed specific legislation to authorize loans or instruct the Treasury to release bonds or other debt instruments as needed. This worked well until the 19th century, when the advent of the modern financial industry and World War I brought new challenges and issues.
In order to raise funds for the war effort, Congress passed the Second Liberty Bond Act of 1917, setting limits on the different categories of debt the Treasury could incur upon the government’s behalf.
This concept was expanded in 1939 when Congress passed the Public Debt Act of 1939, which functionally created the first limit on total accumulated debt the U.S. government could hold. In 1941, the initial debt ceiling was set at $65 billion dollars.
During World War II, the PDA was raised from $125 billion in 1941 to $300 billion by the end of the war in 1945. Congress amended the PDA in 1946, reducing the ceiling by $25 billion as the booming post-war economy generated a surplus, and the debt ceiling was not amended again until 1954.
Even before World War I, the system had problems. Primarily, Congress was able to approve appropriations but might not be able to fund them without voting to raise the debt ceiling.
The system seems like a patch-work puzzle, as one or both houses of Congress are notorious for not approving appropriations or budgets in a timely fashion, and some budget items might not take affect for years. Therefore, there can be a disjunction between the debt ceiling and what is currently in the federal budget.
Because of this disjunction, lawmakers almost defaulted for the first time in modern history on debt payments in April 1979. This disaster was averted by a last-minute, bipartisan deal.
Seeking to avoid this situation in the future, the House of Representatives passed the Gephardt Rule in 1979, which adjusted the debt ceiling every time a new budget was passed. However, in 2011, the House repealed the rule, returning the nation to the older system.
This resulted in President Obama facing serious Republican opposition to raising the debt ceiling in order to fund budgets already approved by Congress. Ultimately, Congress agreed to raise the debt ceiling to $14.3 trillion at the last minute, avoiding a government shutdown.
Since 2011, we have endured several instances of a near-default, but each time Congress found last-minute solutions. In early 2018, the country suffered two brief shutdowns related to disagreements over the debt limit.
As a result, Congress passed the Bipartisan Budget Act of 2018, which increased discretionary spending for two years and suspended the debt limit until March 2019 when the debt ceiling was reinstated at $22 trillion.
In order to avoid more government shutdowns, the House reinstated a modified version of the Gephardt Rule. However, this rule only applies to the House, as the Senate still needs 60 votes to raise the debt ceiling.
In December 2021, the Senate suspended the filibuster for a one-time vote, allowing for a last-minute increase of $2.5 trillion dollars and bringing the debt ceiling to $31.4 trillion.
The history of the debt ceiling is one that is riddled with political infighting. Originally created to pay for spending during two world wars, it has become a political tool to critique and call attention to what some lawmakers consider excessive government spending.
Republicans accuse Democrats of pushing a tax-and-spend agenda and of refusing to care about the impact of the nation’s debt. Democrats accuse Republicans of obstructing government operations and forcing shutdowns for political gain.
In truth, the national debt is the result of government spending under both parties, and the debt ceiling has repeatedly been increased under both Republican and Democrat presidents and under both Republican-controlled and Democrat-controlled Congresses.
In 1995, the debt limit was less than $5 trillion, and now it exceeds $31.4 trillion. While this is a huge increase, the percentage in relation to the Gross Domestic Product has remained relatively stable. In 1946, the debt ceiling was roughly equivalent to 120% of GDP; it is around 125% today.
We forget that it was the post-war booming economy which brought the debt limit down to almost 30% of the nation’s GDP.
In short, we have seen all of this before. We have had similar debt-to-GDP ratios, faced government shutdowns, and seen our political parties link budget and debt votes to both social and economic agendas.
This all illustrates that much of the system is broken and the government needs to look at a different system — possibly a new budget reconciliation process or redefining the debt ceiling in terms of a percentage of the GDP.
Regardless of the solution, Americans have spent generations watching our leaders fight the same old fights. It is time for our leaders to grow up and move forward with a real plan.