The Exchange

Here’s Why We Have a Debt Ceiling in the First Place

The Exchange

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America was once the world’s model democracy. Now it’s a global laughingstock with a government that can’t keep the lights on and is threatening to renege on its debts. How did this happen?

A lot of voters blame whichever political party they hate the most for the government shutdown and the looming debt-ceiling battle. But the seeds of the latest fiscal smackdown were sown almost a century ago, when Washington needed to raise a lot of money fast to finance World War I. In 1917, when Congress enacted new limits on the amount of debt the U.S. government could issue – a “debt ceiling” – it made federal spending easier, not harder, because it eliminated the need for Congress to approve every debt issuance one by one. Today, by contrast, the routine need to extend the debt ceiling has become a negotiating ploy, with politicians disrupting federal spending as a way to gain leverage on other policy issues.

The Treasury Department says it will run out of money around Oct. 17 if the federal borrowing limit, which is currently about $16.7 trillion, isn’t raised. Congress has raised the debt limit 18 times during the last 20 years, but what’s happening now is basically a rehash of the 2011 debt-ceiling standoff, in which Congressional Republicans demanded deep spending cuts in exchange for a vote to raise the borrowing limit. That dispute was resolved at the very last minute, but the political brinksmanship led to the first-ever downgrade of the U.S. credit rating and a stock-market swoon that lasted for six months.

If the U.S. budgeting process seems uniquely chaotic, well, it is. “Not one single advanced country has taken this approach,” says John Blake, chief equity strategist for Zacks Investment Research. “If you’re the only one in class with this idea, and nobody else takes it up after years and years, it’s fair to conclude it’s a dumb idea.”

There are two basic oddities of the U.S. budgeting process that other countries don’t have to grapple with. First, Congress approves spending bills without always approving the funding needed to cover the spending, like an impulsive shopper who buys stuff at the mall without having cash at the bank to pay the bills. Since Congress routinely approves more spending than the government can pay for with tax revenue alone, it’s a given that the government will have to borrow money every year by issuing Treasury securities, and that the total amount of federal debt will inevitably rise. In that way, Congress is now arguing with itself over whether to pay bills it has already incurred.

Second, governments of most other advanced countries include the authorization for borrowing, if necessary, in spending bills passed by the legislature. So there’s no need to raise borrowing limits months after bills that require more borrowing actually pass. Congress, by contrast, repeatedly sets up confrontations over the debt ceiling by approving spending levels that necessitate the additional borrowing Congressional Republicans are now protesting.

Many nations do put limits on the amount of debt the government can take on, but it’s usually expressed as a percentage of GDP rather than a fixed amount of money. That allows cumulative borrowing to rise without limit, as long as it’s proportionate to economic output. The 27 nations that belong to the European Union, for instance, target total debt levels to no greater than 60% of GDP, along with annual deficits that are no greater than 3% of GDP.

Some countries have obviously exceeded those targets, including Italy, Spain, Ireland, Portugal and of course Greece. That highlights the difficulty Europe has enforcing its rules for government borrowing. Still, no European nation—not even Greece—has threatened to default on its debt simply because politicians disagree on basic policy issues, as the U.S. Congress has done. In 2011, the Government Accounting Office examined budget practices in several other countries including Canada, Germany, Switzerland and New Zealand, and concluded that “the United States is unusual in using the authorization of additional borrowing authority as an occasion to draw attention to past fiscal policy decisions.”

There was once a nifty way around repeated debt-ceiling standoffs. Starting in 1980, the so-called “Gephardt Rule,” named after Democratic Rep. Dick Gephardt of Missouri, allowed de facto increases in the debt ceiling to match the amount of spending Congress approved in a given year. That meant no second vote on raising the debt limit would be needed once a federal budget had been passed. The rule tamped down budget disputes for 15 years but was revoked after Republicans captured the House of Representatives in 1994. Some budget watchers think it should be restored.

Congress could also do away with the debt limit altogether, since it’s not required by the Constitution. Or it could give the Treasury Department more authority to do whatever is necessary to pay the nation’s bills. What’s more likely, however, is a series of temporary increases in the debt limit that allow more federal borrowing but also guarantee we’ll fight familiar battles many times in the future—and provide other nations continual reminders of how not to run a country.

Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.

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