On January 19, 2023, the stock of outstanding US federal debt reached $31.4 trillion, technically bumping up against the statutory “debt ceiling”. The Treasury is now resorting to “extraordinary measures” to buy more time for Congress to raise or suspend the debt limit before interest or principal payments come due. A failure to do so will trigger a sovereign default.
If you doubt that this could ever happen, think again, because it already has. In 1790, the Treasury, under Alexander Hamilton, took over the debts of the states and deferred interest payments until 1801. In November 1814, when the War of 1812 had destroyed both the Treasury and the White House, the government did not have enough gold and silver to pay the interest due on its debt. And in 1862, the federal government refused to redeem into gold greenbacks that it had created the previous year.
Then, in 1933, Congress, at the request of President Franklin D. Roosevelt, reneged on the government’s obligation to make payments on Liberty bonds in gold at a fixed price. And in April and May of 1979, a technical glitch caused the Treasury to miss the deadline for redeeming $122 million in maturing Treasury bills, with some investors waiting more than a week to be paid.
According to Article 1, Section 8, of the US Constitution, Congress alone has the authority to borrow on the account of the federal government. The debt limit was created with the Second Liberty Bond Act of 1917, which set it initially at $11.5 billion. Prior to this legislation, Congress had authorised each federal debt that was issued. But ever since its creation, the debt ceiling has provided occasions for shambolic stand-offs between congressional fiscal conservatives and incumbent presidential administrations.
Since 1960, Congress has acted 78 times, 49 times under Republican and 29 times under Democratic presidents, to raise the debt limit, temporarily extend or suspend it, or revise how it is defined. In addition to the accidental default in 1979, there have been many other close calls. The most recent was in 2011, when S&P Global Ratings downgraded the US long-term credit rating from AAA to AA+, even though the US did not default and Congress did eventually raise the debt ceiling by $2.4 trillion.
The periodic chaos and exceptional measures associated with the debt ceiling are both costly and unnecessary. The artificial constraint on outstanding debt means that conflicts about public spending and tax revenues usually have to be resolved at least twice, first when the spending and tax programmes clear the appropriate congressional hurdles and are signed by the president, and then again whenever the debt ceiling is approaching.
This is all a matter of simple arithmetic. The outstanding stock of public debt is a historical artifact. Barring default, it cannot be changed. Congress and the state of the economy (which itself may be influenced by fiscal programs) determine federal public spending (excluding interest payments) and federal tax revenues. Together with the interest payments on the outstanding stock of debt, these figures give us the federal budget deficit for the current period. Add the current deficit to the current period’s initial debt stock, and you get the next period’s initial debt stock. And the exercise can be repeated for future periods to determine the entire sequence of future public debt stocks.
It therefore makes no sense to add an additional debt ceiling to the congressional fiscal-financial arsenal. The congressionally determined debt limit is either redundant or inconsistent. It is redundant when the constraint is not binding, and inconsistent when the constraint is binding, because it is blocking tax and spending policies that Congress has already voted into law. The cases of redundancy are not damaging, but they do make the US look silly. By contrast, the cases of inconsistency are not just costly but potentially catastrophic.
There are several ways to resolve the issue. The debt ceiling could win, forcing Congress to cut spending and/or raise taxes by however much it takes to keep the actual debt below the cap. Alternatively, the deficit could win, leading Congress simply to raise or suspend the ceiling to accommodate the spending and revenue programs that it has already approved. Compromises between these two outcomes are a third possibility. Or, finally, Congress could do nothing and allow the US to default.
A non-accidental default scenario would be an extremely serious matter. Given the US dollar’s role as a global reserve currency and the importance of US Treasury securities in the global monetary and financial system, it would likely produce a financial crisis and a serious recession in the US and worldwide.
What is to be done? The Fourteenth Amendment of the US Constitution states that “the validity of the public debt of the United States... shall not be questioned”. This clause, combined with common sense, argues for a de facto abolition of the debt ceiling. There is no other practical option.
Revoking Congress’s constitutional borrowing authority would likely be a bridge too far and, even if feasible, would take too long. A better solution would be to assign to Congress, through legislation, the “deemed authority” to raise the debt ceiling automatically (assuming it is binding, as it is today) in every current and future period by the amount of the deficit implied by the congressionally determined and presidentially approved federal spending and tax programmes.
Such an action would be equivalent to a permanent suspension of the debt ceiling. It is time to take the Constitution, arithmetic, economics, and common sense seriously and discard the debt ceiling once and for all.
Willem H. Buiter, a former chief economist at Citibank and former member of the Monetary Policy Committee of the Bank of England, is an independent economic adviser. Copyright: Project Syndicate, 2023. www.project-syndicate.org
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