Debt ceiling: From convenience to controversy

Debt ceiling: From convenience to controversy
© The Hill Illustration

 

Congress and the White House are embroiled in yet another fight over the debt ceiling. The irony is that the debt ceiling was initially meant to be a convenience more than a constraint on borrowing, not a vehicle for partisan contentiousness. 

Why must Congress be the one to act on the debt ceiling? Blame that on the framers of the Constitution, who placed the power of the purse in the Congress in Article 1 section 8 (clause two): “The Congress shall have power to (…) borrow money on the credit of the United States.”

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Since its founding, the United States has frequently borrowed money. Each time it did so Congress was required to authorize the issuing of bonds and other debt instruments. Since borrowing was a frequent necessity, Congress repeatedly had to enact debt authorization often for specific programs or projects, including funding for the Panama Canal.

The first debt ceiling was included in the 1917 Second Liberty Bond Act. It set aggregate debt limits and restrictions on types of borrowing. The apparent purpose was not so much to control borrowing as to enable it — without repeated actions by Congress on each bond issue. Later, in 1939, a general limit on debt was enacted and we’ve had aggregate debt ceilings and periodic debt ceiling increases ever since.

But what was once a convenience to enable borrowing has recently become a vehicle for partisan leverage between Congress and the White House. Presidents and treasury secretaries push for timely increases while opposing Congresses hold the debt ceiling hostage for other budgetary priorities. During the Obama administration, a Republican Congress used the debt ceiling to force spending limits in the 2011 Budget Control Act.

Now a Republican administration, facing a financial deadline, is pushing for a debt ceiling increase and the Democrat-led House is demanding a two-year budget deal, with increased spending caps, as the price for enacting a debt-ceiling increase.

The threat of default hangs over these debates. The U.S. is financially dependent on borrowing because our annual budgets are way out of balance. The deficit for the current fiscal year is estimated at just short of $1 trillion. That’s about equal to two-thirds of discretionary spending on things ranging from defense to education to national parks. Without borrowing the government would lack the cash flow to pay its bills. That could mean default on our bonds if interest payments were missed.

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But section four of the 14th Amendment says, "(T)he validity of the public debt of the United States, authorized by law (…) shall not be questioned.” This could suggest that debt service would take precedence for available cash and other discretionary spending would have to be cut first. 

Others may hold the view that defaulting on debt service would be pretty inconsequential given the overall financial strength of the U.S. These are questions best left as hypothetical. Would we really like to test the consequences of a debt-ceiling impasse?

The political brinksmanship associated with the debt ceiling and high annual budget deficits projected to increase in future years are related issues, but unfortunately spending decisions and debt decisions are disaggregated. Budgetary spending and revenue decisions are made through annual appropriations bills and occasional tax legislation. Debt decisions occur only episodically when the debt ceiling is hit. By then, Congress is only approving debt to cover spending decisions it previously made. 

One proposed solution is simply to repeal the debt ceiling. But that would mean an abdication by Congress of an important constitutional duty. As James Madison argued in Federalist 58, “This power of the purse may, in fact, be regarded as the most complete and effectual weapon with which any constitution can arm the immediate representatives of the people. ...”

A better idea might be to link budgetary and debt decisions within the annual budget process. Once Congress has agreed on spending levels and estimated tax revenues in the concurrent budget resolution, this budget should then contain specific authorization to incur debt to cover the gap between spending and revenues. In doing so, Congress would have to acknowledge the annual borrowing needed to support its spending decisions.

Fiscal transparency would be served and it might even lead to better fiscal discipline.

Douglas A. Brook, Ph.D., is a visiting professor in the Sanford School of Public Policy at Duke University. He has served in three presidentially-appointed senior financial management positions in the Pentagon.