Wednesday, October 09, 2013

Thoughts on The Debt Ceiling


Far from promoting fiscal prudence and expenditure restraint, as claimed by its protagonists, the federal debt limit has in fact eroded the integrity of our federal budget, interfered with efficient expenditure scheduling and effective debt management, endangered our defense program, and aggravated the 1957-58 recession.  
Walter W. Heller, Chair, Dept of Economics, Univ of Minnesota
Proceedings of the Annual Conference on Taxation under the Auspices of the National Tax Association, Vol. 51, (1958), pp. 246-257
The "debt ceiling" is a colloquialism for a statutory limit placed by Congress on the borrowing authority of the United States Treasury.  The Treasury may borrow up to the stipulated amount.  Any further borrowing must be authorized by an act of Congress. This constitutes "raising the debt ceiling."

The US Constitution gives authority over the nation's finances to the House of Representatives.  Both borrowing and spending are the responsibility of the House.  Under the law, all debt financed by the Treasury is debt authorized by the Congress.  However, when the Congress authorizes new spending (i.e., new debt), it is not necessarily giving the Treasury authority to borrow.  The Treasury itself, and branches of the gov't themselves, are not accumulating new debt without Congressional authority.  Treasury therefore has an authorized spending limit higher than its authorized borrowing limit.  When Treasury reaches the borrowing limit, a request is made to Congress to raise the limit.


Prior to 1917, the United States did not have a "debt ceiling" per se.  In fact, the US gov't prior to that year did not have a systematic approach to handling gov't bills and debt.  The Treasury Department was in charge of official debt, such as Treasury bonds.  But, debt and bills accumulated by individual departments, such as the Department of Defense, were handled by the individual departments.  Nominally, a department was supposed to draw up a bill for an expense and present it to the House.  The House would approve the bill and the money was allocated through Treasury.  The department would then spend the allocated money.  In reality, it was not uncommon for departments to simply run up expenses for given projects and afterward, submit a bill to the House to be passed to pay for accrued expenses.  Since the department had already spent the money, the Congress had little choice in approving the submitted bills.

To the extent that budgetary bills from the Treasury and the gov't departments were presented in the normal manner, the Congress regulated the amount of debt accumulated by refusing to pass individual debt obligation bills. The Second Liberty Bond Act of 1917 extended certain privileges to the executive branch to take on debt without requesting permission from the Congress, with the stipulation that the amount of debt accrued must stay below a "ceiling" or limit established by Congress.  The law established an aggregate total for gov't bond issues, while authorizing an additional issuance of Liberty Bonds to cover war costs.

At the time the Second Liberty Bond Act was enacted, "debt ceiling" was really "debt ceilings," as the laws established separate limits on debt accrual for bonds, bills, certificates, and notes.

In 1941, the Public Debt Act raised the limit and revamped the borrowing system, rolling up almost all Federal gov't borrowing and establishing it under the Treasury Dept.  At this time, the segregation of debt limits by instrument was abolished and the Treasury was given authority to issue debt as it saw fit, as long as it stayed under the mandated limit.

Passage of the Budget and Impoundment Control Act of 1974 substantially changed the rules by which budgets were written.  As a result, in 1979, the House implemented a parliamentary rule that deemed the debt ceiling raised when a budget was passed.  This was a simple resolution to the absurdity of appropriating money in the budget but providing no way for the money to actually exist.  This rule was repealed by the House in 1995, after the Republicans regained the majority.

Legal Issues

If the Congress does not reauthorize an increase in the debt limit, the US gov't officially has insufficient funds to cover all its bills.  At the time of this writing, the estimate is that about 20% of the total amount due would go unpaid, without an increase in the limit.

The legality of the debt ceiling has been challenged by policy analysts and legal theorists, but it has not been challenged in court.  There are two basic challenges.
  • Congress cannot cede its authority over the finances to the executive branch.
    • Allowing Treasury the latitude to acquire debt without supervision of Congress is an unconstitutional cession of authority.  Congress must approve every new acquisition of debt -- as it did prior to 1917.
  • Congress cannot refuse to pay the country's legally established financial obligations.
    • An argument is made based on the stipulation of section 4 of the 14th Amendment:
The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.
This section, of course, was adopted in the aftermath of the Civil War and was intended to insure that all war debts were honored.  However, the plain wording of it applies to all debt.  If this understanding of the text is valid, then the Congress simply may not refuse to raise the debt ceiling -- because that ceiling applies only to debt incurred for spending already authorized by Congress.

Additionally, as a matter of contract law, can the Congress arbitrarily refuse to honor its debts?  In the 1935 case, Perry v United States, the Supreme Court said no -- emphatically.
In authorizing the Congress to borrow money, the Constitution empowers the Congress to fix the amount to be borrowed and the terms of payment. By virtue of the power to borrow money "on the credit of the United States," the Congress is authorized to pledge that credit as an assurance of payment as stipulated, as the highest assurance the government can give -- its plighted faith. To say that the Congress may withdraw or ignore that pledge is to assume that the Constitution contemplates a vain promise, a pledge having no other sanction than the pleasure and convenience of the pledgor. This Court has given no sanction to such a conception of the obligations of our government.


If the Congress cannot refuse to raise the debt ceiling, how can it control spending?  By controlling itself.  The spending does not originate in the Treasury, nor does it originate in the Executive Branch.  It originates in the House of Representatives.  The Treasury reportedly pays over 100 million bills a month.  This number, of course, includes all kinds of checks issued to Social Security recipients, veterans, and the like.  The obvious resolution is for Congress to authorize borrowing at the same time it authorizes spending.  If it's going to authorize $1 trillion for the Defense Department, and the projected revenues are only $648 billion, then Congress should authorize $352 billion in debt to cover the shortfall.  Or course, the actual formula for determining the borrowing authorization would be more complex and probably take up 1,000 pages; but the principle is the same.  It's not that Congress should stop spending; it's that Congress should balance its budget by preparing for the shortfall and acknowledging it.

The debt ceiling originated as a convenience method for the Congress to provide Treasury with a flexible means of handling Federal debt.  It has morphed into a means for Congressional minorities to fight out budgetary battles that were lost on the House floor.  If the Representatives cannot play by the rules, change the rules.