A Familiar Landmine: The Looming Debt Ceiling
Laura Blessing | June 4, 2021
With all the other tumult going on in our politics, one might be forgiven for not focusing on a familiar landmine: the debt ceiling. After all, since its regularized inclusion in the appropriations process a decade ago, Congress has shifted from extending the debt limit to a specific amount of debt to setting a date at which point Treasury cannot borrow more, burying the doomsday device farther ahead in the calendar, only to dig it up and rebury it again. But just because we have become accustomed to this state of affairs does not mean we should be blasé about the congressional bomb squad. We could be coming up on another showdown, one potentially with long-reaching consequences, even as Congress juggles an unusually high number of consequential items. Understanding this means understanding what the debt ceiling is and what it does, its history, recent position-taking in Congress, and today’s unusual complications.
What is the Debt Ceiling?
The debt ceiling was created in 1917. Like many big fiscal policy changes, Congress enacted this in reaction to a crisis: fighting World War One had run up debt that concerned policymakers. The debt limit was further modified and institutionalized in 1939, and imposes an aggregate limit on almost all federal debt, including both debt held by the public (what most fiscal discussions usually simplify as our just our federal debt—currently around $22 trillion, the number that CBO and other debt-to-GDP ratios use) and debt held by the government’s own accounts (currently around $6 trillion—both together are about $28.1 trillion currently). (Some old debt prior to 1917 is excluded, hence the “almost all” qualifier.) Notably, raising the debt limit does not incur additional spending—it merely allows the Treasury to borrow money to cover spending Congress has already voted for.
This brings us to the question of what defaulting on the debt ceiling would do. A range of experts have described such a move as being “catastrophic”. There are a number of different effects such a move would bring, from downgrading our credit rating (which happened by coming to the razor’s edge of default in 2011), making it harder and more expensive to borrow money, adding to our national debt, and causing extreme volatility in world markets, along with a host of later effects. Congress has used its oversight power to illuminate these risks. In his 2013 congressional testimony, Treasury Secretary Lew stated that:
It points to the potentially catastrophic impacts of default, including credit market disruptions, a significant loss in the value of the dollar, markedly elevated U.S. interest rates, negative spillover effects to the global economy, and real risk of a financial crisis and recession that could echo the events of 2008 or worse.
If interest rates rose, it would have a real impact on American households. The stock market, including investments in retirement accounts, could tumble, and it could become more expensive for Americans to buy a car, own a home, and open a small business.
These additional costs of borrowing could not easily be undone and our actions would impact Americans for generations to come.
Douglas Holtz-Eakin, the former CBO Director, succinctly noted in response to questioning in his 2018 congressional testimony that “US Treasury’s are the foundation of the global financial system. Impairing their liquidity even a little bit would be an economic catastrophe. It can’t happen.”
It’s important to note that there are those who would identify the debt ceiling as having other consequences. Some, particularly conservative fiscal hawks, tout its utility as focusing attention on our national debt and potentially forcing productive congressional compromises. It surely does focus attention, and perhaps a constructive future deal could, in fact, come about in part due to the debt ceiling, though that has not been the trend to date. There are, of course, a range of such statements, and an exchange during congressional hearings held by the 2018 Joint Committee on Budget and Appropriations Process Reform is illustrative of this. Rep. Woodall (R, GA), also make claims that the debt ceiling creates conditions for bargaining that have “always moved the needle for more responsible spending or more responsible governing”. Testifying witness Bill Hoagland (Senior Vice President of the Bipartisan Policy Committee and former longtime committee and leadership staffer to Senate Republicans) took strong issue with this position, identifying that the BCA 2011 sequestration caps were regularly raised by Congress.
There is also misinformation on the debt ceiling. While a broad range of economic experts have a general consensus that default would incur major economic problems, members of Congress, as well as other public figures have argued either that default would not cause problems of note or that it is not credibly known if any problems would occur. Members of Congress can certainly evolve, however. Notably, Speaker Boehner was among a number of Republican lawmakers and candidates questioning default’s ill effects in 2011, but who rounded up Republican votes to raise the limit in 2014.
History of the Debt Ceiling
A brief accounting of the debt ceiling would note that it has been raised over 100 times, and typically without fanfare. (For a more detailed accounting, which is outside the scope of this piece, see here and here.) The Gephardt rule, created in 1979 and most notably suspended by congressional Republicans in 1995 (with many additional modifications over time), was a procedural tool that automatically raised the debt limit upon passage of a budget resolution, without legislators having to take a separate vote on it.
It should also be noted that, as Congress has polarized and had to vote on increasing the limit, there has been plenty of partisan position-taking by both sides in years prior to 2011 by legislators looking to message against the presidential administration’s policies while under no serious threat of default. This position taking in the partisan but not perilous years of 2002-2010 took an expected pattern: those in power voted to raise the limit. President Obama voted against the debt ceiling as a Senator in 2006 in protest of President Bush, which he later regretted. It should not be a surprise to see the seed of our current dysfunction in previous episodes; in politics there is often nothing new under the sun.
But 2011 is the year where the debt ceiling started to have teeth. This was not for debt reduction, but for congressional reform and potential mayhem. The Great Recession and measures intended to avert a Great Depression, on top of structural deficits deepened by the Bush tax cuts, put a number of major institutions in a position to call for major debt reduction, while the wave election of 2010 brought in an emboldened group of Tea Party fiscal conservatives. President Obama and Speaker Boehner made serious attempts at a Grand Bargain, only to be stymied by both failures of communication—but more seriously, a GOP position to not raise taxes in any bargain. Negotiations came down to the wire, with the Senate rejecting the House’s short-term plan and the House returning the favor, just days before default. Finally, Vice President Biden and Senate Minority Leader Mitch McConnell forged a deal at the last minute, one that would not raise taxes and which called for a Super Committee to find $1.2 trillion in cuts over a decade, with sequestration the result if the committee failed. That failure led to the Budget Control Act of 2011 and the system of sequestration we’ve been living under for the past decade—with those caps raised roughly every two years by Congress. In addition to our new system of defense and non-defense discretionary caps (and OCO), this new system has regularized both high-stakes, party leadership-driven brinksmanship, as well as the inclusion of the debt ceiling in appropriations negotiations. The debt limit is the threat that led us here.
Recent Congressional Developments
Over the past few years, there have been major discussions of congressional reforms that have included the debt ceiling. The Trump administration had taken contradictory positions, making them hard to characterize. The Joint Committee on Budget and Appropriations Reform, created in 2018, was not able to report out any recommendations for Congress, but involved a serious consideration of the debt ceiling. The committee print is replete with references to brinksmanship and hostage-taking, with Senator Whitehouse additionally calling it a “bear trap” one did not want to accidentally spring. The 2019 American Political Science Association (APSA)’s Congressional Reform Task Force recommended eliminating floor votes on the debt ceiling. Other expert voices around this time also echoed that eliminating the debt ceiling wholesale may not be politically possible, but that it could be procedurally handcuffed in various ways to become harmless. Some take a more limited position towards reforming the debt limit to make it less dangerous and more in service to actually reducing the federal debt.
The state of play right now looks to be gearing up for another high-stakes showdown. The Biden administration just released their full budget last week, with economic estimates of significant yearly deficits for years, with realistic (i.e. not artificially inflated) growth estimates. In late April, as Senate Republicans were considering their conference rules, they included the rule that any debt ceiling increase would need to be coupled with comparable spending cuts—the position of congressional Republicans in the 2011 imbroglio. While the rule is non-binding, Senate Minority Whip Thune notes that it is unlikely that he can gather 10 Republican votes to extend the limit absent spending cuts. What this means is that congressional Democrats will need to use reconciliation to raise the debt limit, which is set to expire on July 31. While debt ceiling brinksmanship and the regular inclusion of it are, dangerously, not new, it should be noted that reconciliation has only been used to increase the debt limit four times in our history, making this an even greater hurdle than the rest of this context would suggest.
Meanwhile, Secretary Yellen and other Treasury officials warn that, given the pressures of pandemic spending, the extraordinary measures Treasury typically engages in to avert default will not provide as much time and negotiating room as more funds are needed. The fact that the sequestration regime of BCA 2011 only extended for ten years, ending with FY 2021, may embolden congressional reformers eager to use brinksmanship to form a new budgeting system to their liking.
This is a fraught mix: Congress distracted with other monumental tasks, narrow partisan majorities in both chambers, congressional Republicans looking to use fiscal restraint on a Democrat in the White House (the historical pattern), the necessity of using reconciliation, the temptation to use the debt ceiling to create a new budget regime upon the expiration of the old one, a Treasury with less wiggle room in a pandemic, and a more partisan, less trusting Congress—these are all heady ingredients. Congress isn’t known for its ability to deftly walk a tightrope, or stick a landing, however. The sort of messy and time-intensive coalition-building of lawmaking makes one think of herding cats, not sticking a move like Simone Biles. One could not predict in the early days of 2011 what would result from the debt ceiling fight. What results from this current episode could be both volatile and unpredictable. It could be that the debt limit is included in the next reconciliation bill and passed before July 31, perhaps alongside an infrastructure package. But this high wire act should never be possible, even if we happen to safely walk it this time around.
Understanding the debt ceiling is important: what it does, its history, recent position-taking in Congress and today’s many complications. This fight is more than just the familiar landmine we’ve grown accustomed to. Part of the problem of convincing both some members of Congress as well as the public of the dire nature of this fiscal tool is that we are asking them to imagine an as yet unexperienced destruction. We cannot conceive of an undreamt thing. Like Al Pacino’s character in “Scent of a Woman”, we shouldn’t learn the hard way that juggling grenades is a bad idea. Al Pacino characters kept coming to mind, given the actor’s penchant for roles involving brinkmanship and literal hostage-taking. Political parties in Congress shouldn’t constantly be seeking a wartime consigliere. They should find positive incentives, not catastrophic ones. They should leave the gun, and take the cannoli.