Amid the current government shutdown, the need to increase the debt ceiling by October 17 presents another economy threatening showdown. With the effects of the 2011 debt ceiling fight still reverberating, history is repeating itself too quickly. The negative economic impact of the partisan budget brinksmanship of the past two years raises questions about the efficacy of having a debt ceiling. Earlier this year, Federal Reserve Chairman Ben Bernanke publicly challenged the existence of the debt ceiling by saying, "I think it would be a good thing if we didn't have it."
The debt ceiling refers to the limit on how much debt the U.S. government can incur. The foundation for the debt ceiling began during World War I when Congress granted the Treasury Department the flexibility to issue additional war bonds up to a specified amount. In 1939, Congress decided to stop adding amendments to the Second Liberty Bond Act of 1917 (which allowed the Treasury Department to issue different types of bonds) and instead created one aggregate national debt ceiling.
Raising the debt ceiling requires a bill to be passed by Congress and signed by the president. If the debt ceiling is not increased, the government will not be able to borrow more money to meet its existing spending obligations. Therefore, unless taxes are raised, the government will default on payments to entities such as beneficiaries (like Social Security recipients), government workers, contractors, and creditors. Defaulting causes immediate economic problems due to the cut in government services and payments, but it can also have a longer-term impact by threatening the U.S.’s creditworthiness. The Treasury Department has estimated that the failure to increase the debt ceiling before October 17 could cause an economic collapse worse than the 2008 recession.
In 2011, the debt ceiling confrontation between Republicans and Democrats lasted until August 1, one day before the deadline. The deal to increase the debt ceiling allowed it to rise between $2.1 trillion and $2.4 trillion in exchange for cutting a like amount of spending over ten years. However, only part of the increase occurred automatically upon passage of the law; over half of the increase was dependent on the newly created bipartisan debt-reduction committee’s agreement on how to cut spending by between $1.2 trillion and $1.5 trillion. Because a compromise wasn’t reached, automatic spending cuts (called sequestration) went into effect on January 1, 2013.
Although a government shutdown and defaulting on the nation’s debt were avoided in 2011, negative economic effects ensued simply because the negotiations went into the eleventh hour. The Dow Jones Industrial Average dropped by 2,000 points, the government spent an additional $1.3 billion to borrow money in 2011 due to the need to pay higher interest rates, and the credit rating agency Standard & Poor’s downgraded the U.S.’s credit rating. Additionally, the crisis negatively affected private spending and investment decisions as consumer and business confidence dipped.
While the consequences of the current debt ceiling sparring match are yet to be determined, the 2011 crisis certainly brings ominous warnings. For history to repeat itself just two years after the last showdown is truly alarming – especially considering the effects of the 2011 crisis are still being felt by way of sequestration. If the parties learn nothing else from 2011, they should at least realize that the mere threat of passing the debt ceiling deadline is enough to wreak havoc on the economy.
Because the ramifications of a debt ceiling fight are so disastrous, the country needs to avoid another debt ceiling showdown in the near future. If the current level of partisan obstinacy doesn’t wane, the parties should consider Bernanke’s advice on eliminating the debt ceiling. It is after all a relic of World War I budget expediency and not a constitutionally designed safeguard. Even though the U.S. has operated with a debt ceiling for nearly a century, it is not the norm in industrialized countries. Denmark is the rare country that also has a debt ceiling, but theirs is set so high that surpassing it is not an issue. Other countries provide alternatives for how to control debt: Germany links the amount of debt that can be accrued to a percentage of its GDP and Canada establishes the amount of debt it can take on as part of the annual budget process.
Any debt control method surely has its drawbacks, but since the U.S.’s current debt is $16.7 trillion, it’s difficult to argue that the debt ceiling model has been effective. While the debate over increasing the debt ceiling forces the government to seriously consider its spending and borrowing needs, it is a redundant debate. Congress and the president debate a plan to spend money, then they argue about whether or not to raise the debt ceiling to actually pay for what they already agreed to spend.
The debt ceiling has not always posed huge problems; the struggle between Republicans in Congress and President Obama, a Democrat, is the rare instance of a debt ceiling debacle. Indeed, for a huge majority of the 90-plus times since 1940 the debt ceiling has been increased, it has been without conflict. However, given the partisan gridlock that has caused the current government shutdown, it hardly seems useful to have two arguments over the same spending plan. Although Bernanke’s call to end the debt ceiling has gone unheeded, the parties would do the country a favor by debating the demise of the debt ceiling rather than quarreling over raising it.
Is the debt ceiling necessary? Should the U.S. try another debt control method? Leave a comment.
Raising the debt ceiling requires a bill to be passed by Congress and signed by the president. If the debt ceiling is not increased, the government will not be able to borrow more money to meet its existing spending obligations. Therefore, unless taxes are raised, the government will default on payments to entities such as beneficiaries (like Social Security recipients), government workers, contractors, and creditors. Defaulting causes immediate economic problems due to the cut in government services and payments, but it can also have a longer-term impact by threatening the U.S.’s creditworthiness. The Treasury Department has estimated that the failure to increase the debt ceiling before October 17 could cause an economic collapse worse than the 2008 recession.
In 2011, the debt ceiling confrontation between Republicans and Democrats lasted until August 1, one day before the deadline. The deal to increase the debt ceiling allowed it to rise between $2.1 trillion and $2.4 trillion in exchange for cutting a like amount of spending over ten years. However, only part of the increase occurred automatically upon passage of the law; over half of the increase was dependent on the newly created bipartisan debt-reduction committee’s agreement on how to cut spending by between $1.2 trillion and $1.5 trillion. Because a compromise wasn’t reached, automatic spending cuts (called sequestration) went into effect on January 1, 2013.
Although a government shutdown and defaulting on the nation’s debt were avoided in 2011, negative economic effects ensued simply because the negotiations went into the eleventh hour. The Dow Jones Industrial Average dropped by 2,000 points, the government spent an additional $1.3 billion to borrow money in 2011 due to the need to pay higher interest rates, and the credit rating agency Standard & Poor’s downgraded the U.S.’s credit rating. Additionally, the crisis negatively affected private spending and investment decisions as consumer and business confidence dipped.
While the consequences of the current debt ceiling sparring match are yet to be determined, the 2011 crisis certainly brings ominous warnings. For history to repeat itself just two years after the last showdown is truly alarming – especially considering the effects of the 2011 crisis are still being felt by way of sequestration. If the parties learn nothing else from 2011, they should at least realize that the mere threat of passing the debt ceiling deadline is enough to wreak havoc on the economy.
Because the ramifications of a debt ceiling fight are so disastrous, the country needs to avoid another debt ceiling showdown in the near future. If the current level of partisan obstinacy doesn’t wane, the parties should consider Bernanke’s advice on eliminating the debt ceiling. It is after all a relic of World War I budget expediency and not a constitutionally designed safeguard. Even though the U.S. has operated with a debt ceiling for nearly a century, it is not the norm in industrialized countries. Denmark is the rare country that also has a debt ceiling, but theirs is set so high that surpassing it is not an issue. Other countries provide alternatives for how to control debt: Germany links the amount of debt that can be accrued to a percentage of its GDP and Canada establishes the amount of debt it can take on as part of the annual budget process.
Any debt control method surely has its drawbacks, but since the U.S.’s current debt is $16.7 trillion, it’s difficult to argue that the debt ceiling model has been effective. While the debate over increasing the debt ceiling forces the government to seriously consider its spending and borrowing needs, it is a redundant debate. Congress and the president debate a plan to spend money, then they argue about whether or not to raise the debt ceiling to actually pay for what they already agreed to spend.
The debt ceiling has not always posed huge problems; the struggle between Republicans in Congress and President Obama, a Democrat, is the rare instance of a debt ceiling debacle. Indeed, for a huge majority of the 90-plus times since 1940 the debt ceiling has been increased, it has been without conflict. However, given the partisan gridlock that has caused the current government shutdown, it hardly seems useful to have two arguments over the same spending plan. Although Bernanke’s call to end the debt ceiling has gone unheeded, the parties would do the country a favor by debating the demise of the debt ceiling rather than quarreling over raising it.
Is the debt ceiling necessary? Should the U.S. try another debt control method? Leave a comment.
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