Debt Ceiling Crisis Déjà Vu?
by Jessica Schieder, 10/23/2015
In 2013, the country gasped at the willingness of radical deficit-hawks to hold the country’s credit-worthiness hostage in an attempt to force cuts to Social Security and Medicare.
Two years later, we’ve got déjà vu.
Once again, a self-inflicted economic disaster looms on the horizon. Failure to approve a routine measure allowing the U.S. to manage its finances and pay the bills it already owes would have devastating effects. Increasing the debt ceiling before the early November deadline is the only way to avoid a potential destabilization of the American economy.
In 2013, the Treasury Department released a report shortly before the debt ceiling deadline stating, "Even the prospect of a default can be disruptive to financial markets and American businesses and families." At the time, deficit hawks were demanding budget cuts, especially to healthcare programs included in the Affordable Care Act, in exchange for giving permission for the government to pay the bills it already owes. Two years later, the political situation is surprisingly similar.
The U.S. Treasury has been using extraordinary measures over the last several months to manage the country's bills – these measures will be exhausted in early November. That is the deadline for increasing the debt ceiling. In addition to the debt ceiling deadline, there are a number of pressing issues will need to be resolved this fall. Congress needs to extend highway funding before an October 29 deadline and negotiate a budget deal or continuing resolution before funding runs out on December 11 to avoid a shutdown.
The White House has refused to muddy the waters.
Because an agreement on the debt ceiling is just one of several agreements needed to keep the federal government and the economy functioning through the winter, some in Congress have, once again, been tempted to blend these negotiations together. For example, some in the Freedom Caucus have already demanded that budget decisions be attached to an approval of the debt ceiling. These members seem to be willing to "play chicken" with default, despite the serious economic repercussions it would have.
The White House has remained firm that it will only support a "clean" increase in debt ceiling. Keeping budget issues in budget discussions, and discussions about the debt ceiling and protecting the country’s creditworthiness separate.
The full faith and credit of the United States is at risk.
Besides potentially destabilizing the American recovery from the Great Recession, instability in the American market will ripple around the globe. The mere threat of default in 2011 cost the country $19 billion through increased interest rates in the Treasury market, according to an estimate by the Bipartisan Policy Center.
As a result, we are joining with our partners, including the Coalition on Human Needs, to demand that Congress stop scaring us this Halloween.
Raising the debt ceiling is in the interest of every American, so Congress should do it as soon as possible to promote the interests of the American people. In addition, long-term reforms should be made to avoid these types of crises from taking place in the future.
How the Debt Ceiling Came About
It is widely understood that Congress has the constitutional "power of the purse" – the ability to tax, spend, and authorize borrowing. Before World War I, the budgets produced by Congress contained specific financing instructions. Congress dictated the amount to be spent on projects (which it still continues to do), as well as how the Treasury would pay for such projects (i.e. interest rates, maturities, and details of when bonds could be redeemed).
Over the course of 19th century, Congress began to allow the Treasury more freedom to determine how bills would be paid. For example, by 1898, Congress gave broad guidance for funding for the Spanish-American War: it was to be paid for using "$100 million outstanding in certificates of indebtedness with maturities under a year … [and] $400 million in longer-term notes and bonds." Within these limits, there was "substantial administrative leeway" given to the Treasury, according to the Congressional Research Service (CRS).
Detailed financing instructions were gradually eliminated before World War II. Congress began to focus more on the quality and quantity of government investment, instead of the number and type of bonds being used to finance the spending.
Under President Franklin Roosevelt, Treasury Secretary Henry Morgenthau formally proposed in 1935 that Congress limit the total amount of bonds (debt) instead of limiting the sale of additional bonds (debt). Congress approved the first aggregate debt limit of $45 billion in 1939, which included all forms of American debt under one standardized limit. But when the U.S. entered WWII, the debt ceiling was quickly raised to over $300 billion, and debt after WWII rose to about 110 percent of Gross Domestic Product. (It fell quickly as the economy grew in the 1950s.) It was during the period since WWII that the modern consolidated federal budget came into being.
The debt ceiling has been raised almost 100 times since 1940, by both Republicans and Democrats.
For Further Reading:
Don’t Pave Our Potholes with Corporate Tax Cuts, The Fine Print, 10/14/2015
Trump’s is a Tax Plan for the Wealthy, The Fine Print, 10/08/2015
Protect Social Security Disability Insurance Without Cutting Benefits, The Fine Print, 9/23/2015