Dr. Robert Irons-Associate Professor of Finance
Jackson Bettis wrote an opinion piece in the October 15 Argus which contains an unintended bit of misinformation. Mr. Bettis states that “[…] the debt ceiling was created to limit federal agencies from overspending without Congressional approval.” That statement is factually incorrect. In this current climate of political division, I feel it is important to have a true understanding of the facts surrounding this issue.
The debt ceiling was established in 1917 as part of the Second Liberty Bond Act. Before the debt ceiling was enacted, Congress had to approve each new issuance of debt with its own piece of legislation. Given the frequency of issuing debt, Congress wished to streamline the process. By instituting a ceiling, Congress was providing the President with a number that recognizes the commitments already made by both parties in both branches of the federal government. In this way, bills could be paid, benefits extended, and promises kept, without the need to enact legislation for each new issuance of debt. The true purpose of the debt ceiling was not to limit the spending ability of either branch of the government, it was a way to enable the branches to govern while limiting the necessary paperwork.
Although some members of Congress choose to depict that the purpose of the debt ceiling was to limit spending, this is not necessarily the case. The purpose of establishing the debt ceiling was to pave the way for the federal government to be able to pay for the programs it had already enacted, without having to issue new legislation each time. The limit was never intended to be permanent – the ceiling was enacted specifically because it provided flexibility. Instead, the debt ceiling was designed to see to it that the promises already made by Congress and the White House are paid for; to enable spending while avoiding paperwork. It allows the government to finance its existing obligations – those already authorized by Congress and the President.
The debt ceiling has been raised almost 100 times since the end of World War II. Just since 1960, Congress has acted 78 times to either temporarily or permanently raise the debt ceiling or to change how the debt ceiling is defined. These changes have been made by both parties: 49 times under Republican presidents, 29 times during Democratic presidencies. Congressional leaders of both political parties have recognized the need to change the debt ceiling.
Failure to raise the debt ceiling before it is reached would have devastating consequences to our credit and standing in the world. Until now, the U.S. government has never defaulted on its debts. It has come close several times, and those times like this one, were due to political posturing. In modern politics the debt ceiling is another weapon to be used. Were the U.S. government in fact to default on its debt, global financial markets would panic, since both domestic and international financial markets depend on the U.S. for stability, both politically and economically. Even the threat of a default is enough to cause problems; the Government Accountability Office estimates that the debt ceiling standoff in Congress in 2011 increased borrowing costs by $1.3 billion in 2011. The resulting increase in interest rates would affect mortgages, car loans, credit card debt, student loans, and capital investment by corporations.
While Congress has of late attempted to use the debt ceiling for political purposes, its original intent was to make it easier for the government to pay its bills.