Kojo Quartey: Debt ceiling history, pros and cons
I have written on the debt ceiling before, so this is not to explain it again, but to simply provide its history and the pros and cons of having it.
There are numerous public acts that have raised the debt ceiling over the years. Raising the debt ceiling amounts to the government being given the power to borrow and spend more. Essentially, the more access to credit you have, the more you can borrow and spend. The problem is that this could possibly lead to overspending. Keeping the debt ceiling low, keeps a check on spending. If there is a need for certain goods or services, the government is not able to have access to them without the appropriate funds. So let’s look at two scenarios: First, where the debt ceiling is removed to allow the government to spend as much as it wants when it wants. Well, I suspect that would lead to overspending by the government, too much money flowing into the economy and a worsening of inflation and increases in the national debt. Second, where the debt ceiling is not raised in order to restrict the government’s spending. That would lead to numerous bills not paid, such as Social Security, military and other government salaries, layoffs, and a recession.
Now, having said all of that, let’s take a historical look at the debt ceiling. Most of my information comes from sources such as the New York Times and some other credible sources, including Wikipedia.
Before 1917, the U.S. had no debt ceiling. Congress either authorized specific loans or allowed the Treasury to issue certain debt instruments and individual debt issues for specific purposes. The United States first instituted a statutory debt limit with the Second Liberty Bond Act of 1917. In 1939, Congress instituted the first limit on total accumulated debt over all kinds of instruments.
In 1953, the U.S. Treasury risked reaching the debt ceiling of $275 billion. Although President Dwight Eisenhower requested that Congress increase it on July 30, 1953, the Senate refused to act on it. As a result, the president asked federal agencies to reduce how much they spent, and the Treasury Department used its cash balances with banks to stay under the debt ceiling. And, starting in November 1953, Treasury converted almost $1 billion of gold left over in its vaults, which helped keep it from exceeding the $275 billion limit. During spring and summer 1954, the Senate and the executive branch negotiated on a debt ceiling increase, and a $6 billion one was passed on Aug. 28, 1954. The debt-ceiling debate of 1995 led to a showdown on the federal budget, which did not pass, and resulted in the U.S. federal government shutdowns of 1995 and 1996.
On Aug. 5, 2011, Standard & Poors issued the first downgrade in the federal government's credit rating. This contributed to the Dow Jones Industrial Average (DJIA) falling nearly 2,000 points in late July and August. Following the downgrade itself, the DJIA had one of its worst days in history and fell 635 points on Aug. 8.
In January 2013, a survey of 38 highly regarded economists (nobody asked me!) found that 84% agreed that, since Congress already approves spending and taxation, "a separate debt ceiling that has to be increased periodically creates unneeded uncertainty and can potentially lead to worse fiscal outcomes." Only one member of the panel disagreed with the statement. Rating agency Moody's has stated that "the debt limit creates a high level of uncertainty" and that the government should change "its framework for managing government debt to lessen or eliminate that uncertainty".
In 2021, the U.S. debt ceiling has been described as "anachronistic" or outdated with the two major parties criticized for utilizing the debt ceiling to play a dangerous game of chicken for purely partisan political purposes. Hey, I just report these facts, I don’t make them up.
As of January 2023, Treasury Secretary Janet Yellen supported legislation to abolish the debt ceiling, which President Joe Biden has ruled out. As close as we have come in the past, the U.S. has never defaulted on its debt, and this is not the time for that.
Kojo Quartey, Ph.D., is president of Monroe County Community College and an economist.
This article originally appeared on The Monroe News: Kojo Quartey: Debt ceiling history, pros and cons
