U.S. debt ceiling at the end of each year from 1981 to 2010. Indicates which President and which political party controlled Congress by year.

The United States debt ceiling deals with movements in the United States debt ceiling since it was created in 1917. Management of the debt ceiling is an important part of the macroeconomics of the United States economy and finance system.

Overview

A statutorily imposed debt ceiling has been in effect since 1917 when the US Congress passed the Second Liberty Bond Act. Before 1917 there was no debt ceiling in force, but there were parliamentary procedural limitations on the level of possible debt that could be held by government.

Early history

Prior to 1917, the United States had no debt ceiling. Congress either authorized specific loans or allowed Treasury to issue certain debt instruments and individual debt issues for specific purposes. Sometimes Congress gave Treasury discretion over what type of debt instrument would be issued.[1] Between 1788 and 1917 the amount of each bond issue by the United States Treasury had to be separately authorized by Congress by passing a legislative act that approved the bond issue. Congress limited the amount of debt by virtue of its authority to approve or disapprove individual bonds. In 1917, during World War I, the debt ceiling law was passed, which allowed the executive branch to issue bonds and take on other debt without Congressional approval, as long as the total debt fell under the statutory debt ceiling. The United States first instituted a statutory debt limit with the Second Liberty Bond Act of 1917. This legislation set limits on the aggregate amount of debt that could be accumulated through individual categories of debt (such as bonds and bills).

In 1939, Congress instituted the first limit on total accumulated debt over all kinds of instruments.[2] The debt ceiling, in which an aggregate limit is applied to nearly all federal debt, was substantially established by Public Debt Acts[3][4] passed in 1939 and 1941 and subsequently amended. The United States Public Debt Act of 1939 eliminated separate limits on different types of debt.[5] The Public Debt Act of 1941 raised the aggregate debt limit on all obligations to $65 billion, and consolidated nearly all federal borrowing under the U.S. Treasury and eliminated the tax-exemption of interest and profit on government debt.[5] Subsequent Public Debt Acts amended the aggregate debt limit: the 1942, 1943, 1944, and 1945 acts raised the limit to $125 billion, $210 billion, $260 billion, and $300 billion respectively.[5] In 1946, the Public Debt Act was amended to reduce the debt limit to $275 billion.[5] The limit stayed unchanged until 1954, the Korean War being financed through taxation.[6]

Prior to the Budget and Impoundment Control Act of 1974, the debt ceiling played an important role since Congress had few opportunities to hold hearings and debates on the budget.[7] James Surowiecki argued that the debt ceiling lost its usefulness after these reforms to the budget process.[8]

In 1979, noting the potential problems of hitting a default, Dick Gephardt imposed the "Gephardt Rule," a parliamentary rule that deemed the debt ceiling raised when a budget was passed. This resolved the contradiction in voting for appropriations but not voting to fund them. The rule stood until it was repealed by the Republican Congress in 1995.[9]

US government indebtedness has been the norm in United States financial history, as well of most Western European and North American countries, for the past 200 years.

19th century

At the beginning of the 19th century, the US was still in debt from its war of independence. The War of 1812 created conditions that required the US to continue to borrow money into the 1820s.

The US Civil War (and its long term effects) forced the US to borrow large amounts from 1862 to 1880. During this time the US currency was more or less a fiat currency.

Number of requests for increase

Depending on who is doing the research, it is said that the US has raised its debt ceiling (in some form or other) at least 90 times in the 20th century.[11]

Congress has raised the debt ceiling 14 times from 2001-2013. Since 1965, the frequency of debt ceiling increases is about on average.[1]

1995 debt ceiling crisis

Main article: United States federal government shutdown of 1995–96

The 1995 request for a debt ceiling increase led to debate in Congress on reduction of the size of the federal government, which lead to the non-passage of the federal budget, and the United States federal government shutdown of 1995–96. The ceiling was eventually increased and the government shutdown resolved.[12][13]

2011 debt ceiling crisis

Main article: United States debt-ceiling crisis of 2011

In 2011, Republicans in Congress attempted to use the debt ceiling as leverage for deficit reduction. The delay in raising the debt ceiling led to the first ever downgrade in the federal government's credit rating. The credit downgrade and debt ceiling debacle contributed to the Dow Jones Industrial Average falling 2,000 points in late July and August. Following the downgrade itself, the DJIA had one of its worst days in history and fell 635 points on August 8.[14] The GAO estimated that the delay in raising the debt ceiling raised borrowing costs for the government by $1.3 billion in 2011 and noted that the delay would also raise costs in later years. The Bipartisan Policy Center extended the GAO's estimates and found that the delay raised borrowing costs by $18.9 billion over ten years.[15]

2013 debt ceiling crisis

Main article: United States debt-ceiling crisis of 2013

Following the increase in the debt ceiling to $16.394 trillion in 2011,[16] the United States again reached the debt ceiling on December 31, 2012 and the Treasury began taking extraordinary measures. The fiscal cliff was resolved with the passage of the American Taxpayer Relief Act of 2012 (ATRA), but no action was taken on the debt ceiling. Following the tax cuts from ATRA, the government needed to raise the debt ceiling by $700 billion to finance operations for the rest of the 2013 fiscal year.[17] Extraordinary measures were expected to be exhausted by February 15.[18] The Treasury has said it is not set up to prioritize payments, and it's not clear that it would be legal to do so. Given this situation, the Treasury would simply delay payments if funds could not be raised through extraordinary measures and the debt ceiling had not been raised. This would put a freeze on 7% of the nation's GDP, a contraction greater than the Great Recession. The economic damage would worsen as recipients of social security benefits, government contracts, and other government payments cut back on spending in response to having the freeze in their revenue.[19]

Under the No Budget, No Pay Act of 2013, both houses of Congress voted to suspend the debt ceiling from February 4, 2013 until May 19, 2013. On May 19, the debt ceiling was raised to approximately $16.699 trillion to accommodate the borrowing done during the suspension period. The Treasury is now using extraordinary measures to avoid a default. Due to the impacts of the American Taxpayer Relief Act of 2012, the Sequester, and a $60 billion payment from Fannie Mae and Freddie Mac that will reach the Treasury on June 28, 2013, extraordinary measures are currently predicted to last until October 17 by the Treasury, [2] but financial firms suggest funds may last a little longer. Jefferies Group says extraordinary measures may last until the end of October while Credit Suisse estimates mid-November.[3]

References

  1. ^ Austin 2008, p. 2.
  2. ^ Austin 2008, p. 2-3.
  3. ^ "Public Debt Acts: Major Acts of Congress". Enotes.com. Retrieved 2011-08-07.
  4. ^ "A Brief History of the U.S. Federal Debt Limit". Freegovreports.com. 2010-01-28. Retrieved 2011-08-07.
  5. ^ a b c d McCaffery, Edward J. "Major Acts of Congress: Public Debt Acts". E-Notes.
  6. ^ CRS Report for Congress
  7. ^ Kowalcky & LeLoup 1993, p. 14.
  8. ^ Surowiecki 2011.
  9. ^ Green 2011.
  10. ^ Sahadi, Jeanne (May 18, 2011). "Debt ceiling FAQs: What you need to know". CNN. Retrieved August 1, 2011.
  11. ^ CBS News, http://www.cbsnews.com/8301-503544_162-5987341-503544.html
  12. ^ U.S. GAO, "Debt Ceiling: Analysis of Actions During the 1995-1996 Crisis", AIMD-96-130, 1996 August 30
  13. ^ New Republic, "How Clinton Handled His Debt Ceiling Crisis Better Than Obama", Kara Brandeisky, 2 August 2011
  14. ^ Sweet & 8 August 2011.
  15. ^ Bipartisan Policy Center, p. 1.
  16. ^ Levit et al. 2013, p. 1.
  17. ^ Levit et al. 2013.
  18. ^ Sahadi 2013.
  19. ^ Yglesias 2013.

Sources