Written by Bradley Pasekoff
One of the most important aspects of a nation on the international stage is the reliability of their currency and its future outlook. For investors, having this peace of mind knowing their investment is safe is worth every penny. Knowing this, what would happen if a country were to default on their debt and not repay their lenders? This is exactly the scenario that could occur in the United States if the debt ceiling is exceeded by the national debt. While this has never occurred, it is worth noting that the country has come dangerously close to exceeding this limit in the past, and is currently entrenched in a political battle regarding the ceiling’s future. Based on historical trends, we can expect the ceiling to increase to accommodate additional spending. However, how the nation’s policymakers get to this decision is still up in the air.
As a background, it is important to note that the debt ceiling is the maximum amount of money the United States is able to borrow, either from foreign or domestic investors, to repay previous spending. Set by Congress, this figure has been fairly arbitrary since its beginnings. Although not explicitly stated in the Constitution, the debt ceiling was introduced by Congress in 1917 as a mechanism to please those who did not support the country’s involvement in World War I or the large costs associated with the war. While the original budget was set at a “mere” $1 billion, this still represented more than twice the amount of money spent by the federal government the previous year (Elving).
Today, this figure is far greater than the $1 billion mark set in 1917. As the US debt has ballooned since the turn of the century, currently sitting at $28.4 trillion, the debt ceiling has been forced to follow suit. More concerning than the trillions of dollars in debt is the debt-to-GDP ratio, a signal of how much the country is borrowing compared to its cumulative output. In the year 2000, the debt was roughly $5.6 trillion. However, this represented only 55% of the nation’s output level. This number has increased exponentially in the years since, only worsening as a result of the COVID-19 pandemic. Currently, the $28.4 trillion in debt represents a debt-to-GDP ratio of 125%, indicating the country is borrowing significantly more than its producing (Gould & Amadeo). This presents an increasingly alarming issue, as this level of spending will eventually put the country in an undesirable position regarding the need to cut government-funded programs or increase taxes. It is all but certain that these questions will become more prevalent within society in the near future, and will need to be answered eventually.
With these questions at hand, what is the current status of the congressional discussions regarding the ceiling? Perhaps the most problematic issue would be the actual lack of discussions between Democrats and Republicans on the topic. This was seen in the aftermath of the temporary fix of the ceiling that went into effect in early October, as Senator Bernie Sanders, Chairman of the Senate Budget Committee, stated that he predicted that “‘there’s not going to be reconciliation’ [between Democrats and Republicans]” (Snell & Sprunt). The positions of the parties seem fairly simple: Democrats are in power in both Congress and the White House and want to turn their platforms into legislation, while Republicans have said they will not approve spending for these Democrat-backed bills. The nuance behind these arguments also comes with the definition of the debt ceiling, as it is “not a forward-looking budgeting tool” but instead is “the amount that the US Treasury can borrow to pay the bills that have become due” from the past (Rouse). This has provided a point of contention in arguments, as Democrats claim Republicans are acting hypothetically, given some of this debt was accrued during President Trump’s term, during which the national debt increased by nearly $7.8 trillion (Sloan & Podkul). Nonetheless, this latest political standoff does not appear to be coming to a conclusion soon, and will likely need to be solved with legislation passed along partisan lines.
The one underlying ray of light from all these discussions can be found by looking to the past. Since 2000, the ceiling has been raised roughly once a year, signaling this may not be as pressing of an issue as it seems to be. Furthermore, the nation has never once defaulted on their payments, maintaining its reliability and presence as the forefront worldwide currency. These facts seem to suggest that this is just a formality that has been brought upon by the government, and does not pose a real threat to the nation’s economy.
It seems as if the future of the debt ceiling is murky. As an institution, it serves no real purpose, as it does not dictate any future spending, and the federal government has shown their willingness to raise the ceiling to accommodate past spending. At this point, it can be argued that the only reason it still exists is because nothing has come around to replace it. Is it still undetermined whether the future of the United States debt system includes the debt ceiling, but for the time being, it is here to stay.
Works Cited
Congressional Research Service. (2015, November 2). The debt limit: History and recent increases. EveryCRSReport.com. Retrieved November 18, 2021, from https://www.everycrsreport.com/reports/RL31967.html.
Elving, R. (2021, September 24). Congress is seeking (its own) permission to borrow another trillion or two. NPR. Retrieved November 18, 2021, from https://www.npr.org/2021/09/24/1031701538/congress-debt-ceiling-explainer
Gould, H., & Amadeo, K. (2021, October 11). US National Debt by year. The Balance. Retrieved November 18, 2021, from https://www.thebalance.com/national-debt-by-year-compared-to-gdp-and-major-events-3306287
Kenton, W. (2021, October 19). Debt ceiling. Investopedia. Retrieved November 18, 2021, from https://www.investopedia.com/terms/d/debt-ceiling.asp.
Sloan, A., & Podkul, C. (2021, January 15). Perspective | Trump’s most enduring legacy could be the historic rise in the National Debt. The Washington Post. Retrieved November 18, 2021, from https://www.washingtonpost.com/business/2021/01/14/trump-legacy-national-debt-increasee/.
Snell, K., & Sprunt, B. (2021, October 6). Democrats say they’ll accept the GOP’s offer of a temporary debt fix. NPR. Retrieved November 18, 2021, from https://www.npr.org/2021/10/06/1043665471/as-the-threat-of-default-grows-the-senate-faces-another-debt-ceiling-vote.
Rouse, C. et al. (2021, October 6). The debt ceiling: An Explainer. The White House. Retrieved November 18, 2021, from https://www.whitehouse.gov/cea/blog/2021/10/06/the-debt-ceiling-an-explainer/