If Congress doesn’t raise the ceiling, one of the political parties threatens to bring our economy to a halt. That is not a sensible way to run a government. That’s why only the US and Denmark have a debt ceiling set at an absolute amount rather than as a percentage of GDP like other developed countries.
Once the federal budget is not balanced and runs a deficit, the government must borrow more money, go deeper into debt to pay its bills, and not default on paying its loans. Although the U.S. has run a deficit in 77 out of the past 90 years, it has never defaulted on its debt payments because Congress raised the debt limit. However, that threshold may be crossed this year under pressure from the House Freedom Caucus, which demands a cut to the 2023 budget that Congress already approved.
Limiting debt or balancing the budget is not mentioned in the constitution. However, paying off a national debt and setting a debt limit began with the American Revolution. The next big crisis was when the Civil War brought a tremendous 4,000 percent increase in debt. Then, finally, the First World War debts led to the first law to limit debt from federal bonds.
Those initial concerns addressed a specific debt that arose from a specific need, such as fighting a war. However, since the Great Recession, Congress has passed laws that have grown to the point that now a debt ceiling applies to 95.5% of all federal debt. So how did we get here?
We can thank the Democrats for the debt ceiling law we have today, which was substantially established by Public Debt Acts in 1939 and 1940 when they controlled the Presidency and both houses of Congress. However, just having a debt ceiling has not been a problem in the past. Since 1960, Congress has raised the debt limit 49 times under Republican presidents and 29 times under Democratic presidents to avoid the US defaulting on its debt payments.
Congress raised the debt ceiling regularly until 1995 despite some party politics threatening to vote against a budget to fund the government. This stability was due to the parties adopting a parliamentary rule (named the “Gephardt Rule”)in 1979 that automatically raised the debt ceiling when Congress passed a budget.
However, a Republican-controlled House repealed the rule in 1995. Ironically, Republican Ronald Reagan benefitted from the Gephardt Rule by raising the debt ceiling 18 times in his eight-year administration in the 80s. George W. Bush and Bill Clinton were the successive highest administrations with the number of raised ceilings, Bush at 11 and Clinton at 8.
After the Gephardt Rule was repealed, Republicans refused to raise the debt ceiling in 1995. They demanded President Bill Clinton cut budget programs in Education, Environment, and Health Care. Consequently, the government was shut down for a total of 26 days.
The Republicans initiated a budget crisis in 2011 by refusing to raise the ceiling until President Obama cut his budget. They waited to approve it until two days before the Treasury borrowing authority would be exhausted. The government did not shut down, but the Dow Jones average fell 2,000 points. The threat alone raised federal borrowing costs by $1.3 billion in 2011, according to the nonpartisan Government Accounting Office (GAO).
The Republicans rejected Obama’s budget by refusing to raise the debt ceiling in 2013. They would not raise it this time unless President Obama defunded the Affordable Care Act (Obamacare). Their opposition resulted in a 16-day shutdown until the day arrived when the Treasury estimated that their “extraordinary measures” would end. If the shutdown had continued, all government payments would have stopped, possibly including loan payments.
Democrats have also used the debt limit to their advantage. Like the Republicans, the threat of not raising the limit is often waved around. For instance, Senator Joe Biden in 2006 joined other senators in opposing a ceiling increase to protest the cost of tax cuts and the Iraq war, but no shutdown resulted.
Democrat-initiated shutdowns occurred twice in 2018. In January, they refused to fund Trump’s budget, and the government had to shut down for three days. They objected to Trump’s DACA (Deferred Action for Childhood Arrivals) immigration policy which was tucked in the budget that would have subjected unregistered minors to deportation.
In December 2018, Trump got his wish when he said in May 2017 that “our country needs a ‘good shutdown.” That month the Democrats prompted a government shutdown for 35 days, the most prolonged shutdown in history. It intended to stop Trump from funding a wall along our Mexican border.
Initially, both parties in the Senate unanimously passed an appropriations bill without funding a wall. However, outrage from right-wing media and Republicans got Trump to say he would not sign any appropriations bill that did not fund its construction. Ultimately, Trump declared a national emergency on the border with Mexico to access billions of dollars to build the wall.
A government shutdown is not just an inconvenience of closing national parks and laying off government employees; it damages the entire American economy. The Congressional Budget Office (CBO) estimated the December 2018 shutdown cost to be at least $11 billion. The current budget crisis, which began when the debt ceiling was hit on January 19, 2023, could be much worse.
Until now, the US has never defaulted on any bonds. However, Treasury Secretary Janet Yellen has begun implementing “extraordinary measures” to keep the government open and from defaulting on loans. Deploying extraordinary measures to avoid defaulting is a well-worn path, with the Treasury using them at least seven times since 2011.
The current measures are expected to expire as early as the end of summer. Consequently, the country’s financial markets will be under stress for more than half a year before they go over the cliff. According to Yellen, “Once all available measures and cash on hand are fully exhausted, the United States of America would be unable to meet its obligations for the first time in our history.”
If that happens, she believes that, at a minimum, our debt rating will be downgraded, resulting in higher government and individual borrowing costs. In addition, failing to make payments to US bondholders will cut revenue to foreign countries, corporations worldwide, US IRA accounts, and personal holdings. Yellen says this action “would undoubtedly cause a recession in the US economy and could cause a global financial crisis.”
That crisis could permanently damage America because the dollar serves as a reserve currency that is used in transactions all over the world. In effect, the US is the world’s Savings Bank. And while we are the largest reserve fund in the world, our share has been shrinking. Our share of central banks reserves fell in 2020 to 59 percent, its lowest level in 25 years, according to the IMF.
Because most foreign central banks hold dollar-backed securities like U.S. Treasury bonds, the United States can borrow at lower interest rates than other countries. If we skip payments, our securities become less safe, pushing up the interest America must pay to borrow funds in the future. Increasing our interest costs results in a more significant portion of our federal budget for interest payments reducing revenue for domestic social services, structural investments, and employment. In addition, a prolonged government shutdown invites a recession and further budget deficits.
The past cycle of reckless brinkmanship will continue if the right-wing guides House Republicans over the next two budget cycles. However, history shows that both parties use the threat of not increasing the debt ceiling to advance their policy issues. Just exercising the threat creates massive problems in running a functioning government and guaranteeing safe and secure bonds to purchase.
If the Republicans strongly threaten to allow the government to default on its debt obligations, they will lose voters. The Democrats must also be wary of how President Biden handles a shutdown. The party that refuses to abandon an unpopular policy, whether they control Congress or the Presidency, loses. Polls from the Republican-driven shutdowns in 2011 and 2013 show that over three-quarters of the population opposed a shutdown over accepting something less than perfect in the budget.
But a President can also be blamed for a shutdown initiated by the opposition party in Congress. In the Democrat-initiated 2018 shutdown, 53% of Americans blamed Trump and Republicans for the shutdown, compared to 34% who blamed Democrats. That’s because the Republicans focused on a very unpopular issue, building a border wall. A CBS News poll found that 71% of Americans considered the border wall “not worth the shutdown.”
Unfortunately, each party has used the debt ceiling to gut a President’s budget of unacceptable policies. However, to execute that threat is to ignite the collapse of our capitalist financial system. This is a strategy for burning the house down, not building new ones.
If we want to stabilize our budget process and not endanger our economic security, we should adopt what most countries do. The government takes on more debt at the end of accepting the spending or appropriations process. Operationally the quickest and cleanest path for doing that is to resurrect the Gephardt Rule.
Otherwise, we will continue to see a decline in using America’s dollar as the world’s safest investment. That fall we will trigger greater borrowing costs, shrinking government revenue and eliminating construction projects and social services.