Why do we have a debt ceiling?

By Felix Salmon
January 12, 2011

Can someone please explain to me why we have a debt ceiling at all? Its existence seems to violate every tenet of risk management and good governance.

James Hamilton put it well back in 2006:

One of the peculiar embarrassments of the American political process is the fact that Congress votes separately on the deficit and debt, as if they were two different decisions…

If the government is (a) required by the deficit legislation to spend, and (b) precluded by the debt legislation from borrowing, the Treasury would be forced into default. The greater the likelihood markets attach to such an event, the higher will be the interest rate the government has to pay on Treasury debt. A politician who votes for the spending and tax measures that produced the deficit but against a debt ceiling consistent with these is deliberately wasting taxpayer dollars for no purpose other than to grandstand before voters as a “fiscal conservative”. Anyone playing such a game has complete contempt for the intelligence of their constituents.

Looked at another way, this has very little to do with hypocrisy or the voting records of individual legislators. Instead, it’s a built-in systemic stupidity: the existence of the debt ceiling can cause lots of harm, while it does no good whatsoever. As a result, at the margin it will always needlessly raise US borrowing costs, at least by some small amount.

But it’s worse than that—not only is the debt ceiling an utter idiocy, it’s also extremely popular, in a way which only serves to ratify any contempt which US politicians have for the intelligence of their constituents:

71 percent of those surveyed oppose increasing the borrowing authority…

Expensive benefit programs that account for nearly half of all federal spending enjoy widespread support, the poll found. Only 20 percent supported paring Social Security retirement benefits while a mere 23 supported cutbacks to the Medicare health-insurance program.

Some 73 percent support scaling back foreign aid and 65 percent support cutting back on tax collection.

There’s no particular reason why the US public needs to have a reasonably sophisticated understanding of credit spreads, default risk, and the federal budget. I daresay that lots of people genuinely believe that if you cut back foreign aid and tax collection, that would obviate the need to raise the debt ceiling. But the consequence of this is that it gives a real incentive to politicians to vote against raising the debt ceiling, and to attack their opponents, in elections, for repeatedly voting for such a raise.

In other countries, hard limits on debt issuance or total debt or debt servicing costs constitute a serious fiscal commitment and credit risk. In the US, they’re a political distraction at best, and a massive potential tail risk at worst. I’d love to know how this bonkers system came to be, and whether there’s any way of getting rid of it.

Update: Wikipedia tells me that the debt ceiling was introduced to replace a system where Congress approved every debt issuance individually. Which makes sense as a halfway-house on the road to getting rid of this silly constraint completely.

Comments
6 comments so far

You mean politics is showboating about things non-policy wonks consider evil and not about actions most people would consider reasonable when broken down (as you did above)?!1!

Dammit Felix Salmon, you just killed political Santa Clause.

@Chris_Gaun
chrisgaun@gmail.com

Posted by Chris_Gaun | Report as abusive

Yes, great question. How did something favored by 71% of the population ever become law? That is so unlike America.

So, how can we get rid of it?

Posted by NemoP | Report as abusive

Actually, Nemo, the thing favored by 71% of the population is NOT going to become law. What they want is for the debt ceiling to stay where it is. And in fact it’s going up.

Posted by FelixSalmon | Report as abusive

It appears the debt ceiling was first instituted in 1917, but in context of actually giving the Treasury greater power to issue debt. Previously, Congress had to vote in each issuance of debt. So its not like the Treasury had some power and this nonsensical law came on just to put a stop to rational governance. It made sense at the time, like the Senate.

http://fpc.state.gov/documents/organizat ion/105193.pdf

Posted by mushr00m | Report as abusive

This is such an ignorant article – ignorant of the Constitution, ignorant of the spending facts.

Only Congress has the power to borrow money. So it cannot be left to the executive (Treasury Department). As pointed out, the debt ceiling is a blanket authorization to borrow money, instead of one subject at a time. And it started in the ill-fated Wilson era, along with the Fed, the income tax, and elimination of State sovereignty through the popular election of the Senate.

Failure to raise the debt ceiling does not imply default. There are many things for which the government spends money. The interest on the debt and redemption of maturing securities is only a modest portion of the budget. So the debt obligations can still be met without borrowing more. Do not most of us manage to make our mortgage payments without the necessity of borrowing more money? The government can do the same thing. Just reduce the spending in other areas.

Perhaps Social Security payments won’t be as large, or military spending will be cut and the Unconstitutional Department of Indoctrination (err, Education) can be eliminated, etc. Before you get all wanked out about how unfair it is to cut spending to retirees, just remember that these retirees are the very same morons that had over 40 years of voting history to get us into this mess. Greatest generation my a$$. Elections have consequences, as does repeatedly sending spendthrifts to Congress.

Posted by fiscalcon | Report as abusive

Apparently the journalist wasn’t around doing the Bush Years. When they were spending and borrowing like there was no tomorrow. Just think what the national debt would be now if there wasn’t a debt ceiling.

The US National Debt would be over $100 TRILLION DOLLARS, if Cheney and Bush had their way.

Posted by austin4 | Report as abusive
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