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Wonkology: Debt Limit

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October 4, 2013


What is it?

"The validity of the public debt of the United States… shall not be questioned."
-14th Amendment of the US Constitution

The debt limit, or debt ceiling, is a congressionally-legislated cap on the amount of debt that the federal government can hold at any time. When Congress appropriates more funds than the Executive Branch collects in taxes, debt is incurred, which forces the government to borrow money to pay its bills. The differential between the amount collected in taxes and the total liabilities of the government is the deficit. Debt and deficits are hardly a new phenomenon: the United States has been in debt since 1835, and there hasn't been a balanced budget since the 1990s.

Prior to the 1910s, Congress typically issued debt for specific projects. But the financial strain of World War I spurred Congress to issue the first debt limit. The debt limit later came to be seen as an another tool for Congress to exercise its power of the purse and demand fiscal austerity. For example, when President Eisenhower requested an increase in the debt limit in 1953, he was stymied by Senator Harry Byrd (D-VA), who demanded cuts in exchange for an increase. Even Barack Obama refused to approve a debt limit increase as a Senator in 2006, illustrating that the issue reflects both the perpetual conflict between Congress and the Executive and inter-party acrimony.

$16.7 trillion, and not a penny more

Since 1960, Congress has raised the debt limit 78 times (though from 1979 to 1995, it was tied to the authorization of new spending). The current debt limit stands at $16.7 trillion. As his predecessors have done, Treasury Secretary Jack Lew began undertaking “extraordinary measures” on May 19 to keep the debt from exceeding the current limit and recently informed Congress that Treasury would exhaust these measures on October 17. Democrats have called for a clean hike of the debt limit with no additional stipulations or riders, while Republicans, particularly in the House, have a number of items that they hope to trade for an increase. On September 20, the President laid down the gauntlet by calling the Speaker to tell him that he would not negotiate on a debt limit increase.

The path to default

The debt limit debate is often controversial because it requires the President to request that Congress authorize the Executive Branch to pay bills for which Congress has already appropriated funds. Despite some close calls, including the 2011 negotiations that prompted Standard & Poor's to downgrade the US credit rating, Congress has never failed to raise the debt ceiling after the exhaustion of Treasury's extraordinary measures. If Congress did not increase the debt limit, the Treasury could only pay bills based on tax receipts, potentially leaving hundreds of billions of dollars of current liabilities unpaid. The next likely step would be a default, which would have major consequences on the global economy and call into question the full faith and credit of the US government.

The debt limit and you!

Why should you care about the debt limit? As the next budget crisis du jour, expect excessive media coverage and political posturing. But the financial markets will take notice, as they did in response to the 2011 crisis, and we could see higher interest rates and slower economic growth without a timely solution.