Does the Debt Ceiling Really Matter?

Last Wednesday, President Trump reached a surprise deal with Democratic congressional leaders to increase the debt limit, funding the government until mid-December. The short-term debt ceiling extension was packaged with nearly eight billion in Hurricane Harvey relief funding.

 

The deal, which passed on Friday (316-90), was received with indignation from factions within the President’s own party. The same proposal had been rejected earlier in the day by Speaker Paul Ryan (R – WI). Republicans now argue that they will enter re-negotiations in December without the leverage needed to secure spending cuts and conservative reforms. For Trump, who’s remained highly critical of Congress’ failure to pass several of his keystone campaign promises, this is a significant legislative victory. It is also a savvy political move by the self-styled ‘deal-maker’, showing his newfound willingness to cross party lines to avoid needless Congressional obstructionism.

 

According to the New York Times, Trump is now considering doing away with the debt ceiling entirely.

 

So what, exactly, is the debt ceiling?

 

The debt ceiling or debt limit is the total amount of national debt that can be issued by the United States Treasury. In essence, much like a credit card spending limit, it puts a cap on the amount of money the federal government can borrow. And since each year, the U.S. government spends more than it collects in tax revenue, it borrows the difference. Specifically, it “issues debt” – selling Treasury bills, notes, bonds, and inflation-protected securities (TIPS) to other federal agencies, citizens, businesses, local governments and foreign entities.

 

Under Article I, Section VIII of the Constitution, only Congress can authorize the borrowing of money on the credit of the United States. Up until the early 20th century, there was no debt ceiling. Congress would directly authorize each individual debt issued, as it did, for example, to finance the construction of the Panama Canal. However, during World War I, the debt ceiling was created by the Second Liberty Bond Act of 1917, giving the U.S. Treasury greater flexibility in issuing war bonds.

 

In modern times, the debt ceiling is routinely raised without issue – ten times in the last ten years and 78 times since 1960. Contentions arise, and the debt ceiling becomes a political tool, in occasions when the President and Congress can’t agree on fiscal policy.

 

If the debt ceiling isn’t raised, the Treasury can’t issue new notes and must only rely on incoming revenue to pay federal expenses. Programs such as Social Security, Medicare and Medicaid would be endangered. Federal workers would be furloughed. Interest rates would rise and the economy would turn sluggish.

 

In reality, while the potential consequences are disastrous, they are highly likely to come to fruition. With a $19 trillion dollar national debt, raising the debt ceiling is almost a symbolic gesture at this point.

 

On  Friday, President Trump signaled an openness to permanently remove the federal limit on government borrowing.

 

“For many years people have been talking about getting rid of [the] debt ceiling altogether and there are a lot of good reasons to do that,” Trump said at the White House.

 

This is a stunning reversal of his campaign promise to reel in the national debt. It is also a significant blow to his party’s official long-standing stance, which holds that the debt ceiling should be raised only if other fiscal reforms are taken to restrain the size of government.

 

However, the idea has historically experienced a fair amount of support amongst both Democrats and Republicans. It would take effectively take away an obstructionist mechanism and longtime political bluff that could lead eventually to a default, and economic catastrophe.

 

The President didn’t outline any specific proposals to jettison the debt ceiling, However, it is believed that Vice President Pence is advocating a solution that would automatically “raise the debt ceiling every time Congress approves a budget.”

 

While permanent reform to the debt limit is only theoretical at this point, in the short-term, Congress has until December 15th to hammer out a new deal to avoid a government shutdown.  

Chris Marchesano