Is it Time for the United States to Restructure its Debt Limit?
On January 19th, 2023 the United States came face to face with the worst debt ceiling crisis it has ever seen…since 2013. The history of America’s debt ceiling can seem like an endless carousel of crises followed by hyper-partisan political standoffs and national division.
On January 19th, 2023 the United States came face to face with the worst debt ceiling crisis it has ever seen…since 2013.
The history of America’s debt ceiling can seem like an endless carousel of crises followed by hyper-partisan political standoffs and national division. Political leaders have succeeded in presenting begrudging policies as resolutions until the next crisis hits a few years later. In the last two decades, the United States has hit its debt ceiling four times.
Though most countries have legislatively imposed limits on government borrowing, the United States’ debt ceiling is different from many other nations because it is set at a fixed amount, rather than as a percentage of GDP, as is the case in Canada. Prior to the creation of a formal debt ceiling, the United States congress needed to approve each and every bond issued by the Treasury. Following World War I, Congress loosened its oversight to allow governments more flexibility in how they issued debt to finance projects.
Unsurprisingly, debt limits set in the early 20th century were not sufficient to meet the spending needs of the American government as the country grew. US politicians and elites engaged in ever-more costly domestic development and military projects. When politics operates smoothly, raising the debt limit is a routine event in congress, giving license to the executive branch to continue financing their fiscal policies. The debt limit was raised 18 times during Ronald Reagan’s eight years in office and 11 times under Obama. The debt limit has already been raised twice during Biden’s tenure in office.
The debt ceiling only poses a crisis, however, when the limit is reached and congress and senate refuse to adjust it. And so we find ourselves in 2023.
Having already reached its $31.4 trillion limit, the Biden administration is in a tough spot, and the treasury department can only buy so much time with creative accounting maneuvers. If the debt ceiling is not increased, there could be disastrous economic consequences. The government would be unable to pay for basic programs such as welfare or veterans’ support. There has been talk of “prioritizing” some bond payments over others in a kind of triage that could leave many without essential services and potentially trigger a financial crisis.
Despite these consequences, Kevin McCarthy’s Republican-majority congress is adamant that they will not vote to raise the debt ceiling unless the Biden administration commits to significant reductions in federal spending (though they have yet to deliver a clear proposal for what cuts would be sufficient), pitting the two parties against each other in a game of political chicken.
It’s a dire situation. One in which the economic livelihoods of millions of Americans, and the economic stability of the world at large, is being held hostage in a political gamble.
In the meantime, economists and political pundits are coming up with more and more creative solutions to avoid a financial meltdown in a scenario where Republicans refuse to cooperate. #MintTheCoin, a reference to Modern Monetary Theory which theorizes that the United States could simply mint a $1 trillion dollar coin to finance its debt, is trending on Twitter at a scale not seen in years. Though it’s unlikely to turn into a real policy position in the United States, with Treasury Secretary Janet Yellen dismissing the trillion-dollar coin idea as a “gimmick,” its popularity points to growing frustration with the seemingly endless cycle of debt crises in America.
Written by Sara Chiarotto O’Brien