Should the U.S. Debt Ceiling Be Eliminated?

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Oh, now you’re saying that I’m redundant, that I repeat myself, that I say things over and over — Dr. Frasier Crane (Cheers)

Perhaps a better way to illustrate the notions of redundancy and American politics is in the words of our former Commander-in-Chief himself, George W. Bush:

Botched sayings and canned laughter notwithstanding, the issue is germane with respect to the U.S. debt ceiling, which has been raised over 100 times since 1940.

Every president with the exception of Harry S. Truman has presided over its statutory increase. George W. Bush did it seven times, Bill Clinton four. Ronald Reagan signed eighteen increases into law during his two terms in office. With that many legislative actions over that long of a period, the question is this: why have a debt ceiling to begin with?

Establishment of the U.S. Debt Ceiling

The debt ceiling has been increased well over 100 times since 1940, rising in lockstep with the burgeoning national debt. Source: U.S. Treasury

The debt ceiling was created in 1917 as a part of the Second Liberty Bond Act. Prior to the debt ceiling, Congress had to approve each and every debt issue individually. Needless to say, that became a cumbersome task when the amount of debt issues entered into by the United States was still a relatively low number. Today it would be impossible.

The establishment of the debt ceiling was, in theory, designed to provide a rigid restraint against irresponsible fiscal policy. However, with the government increasing the ceiling 106 times between 1940 and 2011 alone, it is painfully obvious that in reality, the “ceiling” is anything but that. In fact, it has become apparent in recent years that the debt ceiling has turned from being a nominally-useful tool into a political weapon.

U.S. Debt Ceiling: History and Rise to Irrelevancy

The initial debt ceiling was limited in scope, and set at $11.5 billion in 1917. Twenty-two years later, it was expanded to include virtually all government debt and raised to $45 billion. Although it continued to inexorably increase over the next four decades, the slope of its growth (other than during periods of war) did not markedly change until 1980. At that point, record federal budget deficits began a cycle of nearly unabated exponential increases. As a result, it has since doubled approximately every ten years.
When superimposed against the history of U.S. budget deficits over the same period, the reasons for the need to continually raise the debt ceiling become abundantly clear. Much like a family budget, bills have to be paid either by a commensurate amount of total income or by taking on additional debt to finance the shortfall. During the four years between 1998-2001 when the Clinton administration posted cumulative surpluses totaling $558.5 billion, the roughly $6 trillion debt ceiling did not require an increase, as there were no budgetary gaps to finance. However, with budget deficits posted in 62 of the past 74 years, borrowing to finance the shortfall has been necessary far more often than not.

As a result, raising the debt ceiling became a necessary, even routine, endeavor. It was clearly much easier to increase the ceiling than it was to balance the federal budget.

 How Other Countries Handle Their Finances

These countries are in danger of economic turmoil if debts and deficits cannot be reigned in. Image Credit: Forbes Magazine

As the largest debtor nation the world has ever known, the United States, by numerous statistical measurements, has managed its finances poorly. However, by no means is it the only country that has practiced deficit spending long enough to also carry high levels of debt in relationship to GDP. Per David John Marotta’s Forbes article entitled Sovereign Debt and Deficit by Country (2012), Greece, Italy, France, Belgium, Portugal, Ireland, the United Kingdom, Spain, France, Canada, the Netherlands, Japan and Germany join the United States in a so-called “Ring of Fire” — countries that have annual budget deficits of approximately 7%+ while also carrying total national debt in excess of about 50% of GDP. The United States sits squarely in the middle of the “Ring of Fire” with deficits in the 15%+ range and sovereign debt above 100% of total GDP. The report concludes that high deficits and total debt represent “a drag on a country’s economic prospects.”

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