WASHINGTON (NEXSTAR) – Over the past decade, America’s debt has been a topic on citizens’ minds and politicians have used the debt limit as a bargaining chip. But why does the debt limit exist? What happens if it’s ignored?
Luckily, the U.S. has never defaulted on its debt, but it has had its credit rating downgraded due to the “political brinksmanship” that has surrounded the subject.
What is the debt limit and why is it important?
The debt ceiling, or the debt limit, is the maximum amount that the U.S. government can borrow to meet its legal obligations by issuing bonds. If the government cannot agree on raising it, the U.S. will default on its loans and will not be given favorable borrowing terms, or even get denied, in the future.
How did the debt limit start?
Before 1917, Congress sold bonds with very specific limits and intentions. In passing the Liberty Bond Act of 1917, Congress gave the Treasury more flexibility regarding the types of bonds they could issue. In 1939, Congress instituted an explicit debt limit. They did this in conjunction with eliminating separate limits on different types of debts, in effect creating the aggregate debt that we observe today.
Why does it keep coming up so often?
One possible explanation can be the events coming out of the 2008 housing crisis and subsequent political discourse about spending.
In 2011, Senate Minority Leader Mitch McConnell (R-Ky.) refused to raise the debt ceiling without severe cuts to the budget and instead offered a new rule to allow the president to propose increases while delegating veto power to Congress, instead of the other way around.
This was the first time that explicit budget constraints were demanded in exchange for debt limit increases, which injected a partisan aspect to the topic that had previously been absent.
How was the debt limit treated before that?
After 1939, the debt limit was a procedural vote that did not break through in the headlines. However, in the 1970s, Congress passed legislation that constructs the modern process and the vote to raise the debt limit became a sticking point.
The Gephardt Rule was then instituted which allowed a workaround for the House to vote on a budget resolution and include raising the debt limit without an explicit vote.
Despite the fiscally conservative label, the Reagan administration saw an explosion in national debt in the 1980s. Economists tend to attribute this to the steep drop in revenue that the federal government experienced as a result of large tax cuts.
At the same time, the debt limit was codified into law, which put more pressure on the Treasury to manage debts despite the revenue decrease.
The government started experiencing shutdowns more frequently and the Treasury utilized “extraordinary measures” to go around Congress and fulfill its financial obligations. The Gephardt Rule helped in some instances but not in all.
The budget was balanced during the Clinton administration in the 90s, and the U.S. experienced a surplus for the first time since 1981.
Defense spending rose greatly starting in 2002 and increased exponentially due to the Iraq War the following year. Deficits became the norm and widened further because the housing crisis caused federal government spending to increase sharply.
What was the fall out from the “McConnell Rule” in 2011?
The S&P downgraded the credit rating of the U.S. and cited “political brinksmanship” during the debt limit crisis as the cause.
A major change that accelerated urgency was the repealing of the Gephardt Rule, also in 2011. Congress could no longer use budget resolutions to raise the debt limit.
With the new partisan dynamics at play, Congress started using a new tactic to avoid default: suspend the debt limit.
In 2013, instead of settling on a number, Congress agreed to essentially extend the amount of time that debt could remain outstanding. This allows the Treasury to continue paying debts while Congress gets ready for the numerical debate.
These new tactics and rules could play a major role in why the debt limit debate keeps surfacing so frequently. Congress alternates between suspending the limit and raising it and neither option offers a longstanding solution, at most pushing the issue back by two years.
