Battle Over Debt Limit Looms as Congress Recovers from Averting Shutdown

COMMENTARY | Congress narrowly averted a federal government shutdown late Friday by agreeing to a framework for the fiscal year 2011 budget. The Sunday morning political programs were full of analysis of this action and discussions of "the next budget battle," which is the need to raise the national debt ceiling.

On one of these programs, Sen. Kay Bailey Hutchinson (R-Texas) described failing to raise the debt limit as "Armageddon." Senators Chuck Schumer (D-N.Y.) and Jeff Sessions (R-Ala.) both agreed it needed to be done, and pointed to consequences of not doing so including investors losing faith in our bonds and interest rates rising and shutting off growth in our economy.

However, some signs of the political games that caused the government shutdown battle to go down to the wire appeared in their rhetoric, with Sessions indicating that we need to demonstrate willingness to get a handle on long term debt problems at the same time. What is this debt ceiling (or debt limit), why does it need increasing, and what would be the consequences of not raising it?

The statutory debt ceiling is a dollar amount beyond which the government is not allowed to borrow. Therefore, when our cumulative national debt rises to this level, the Treasury Department cannot issue any more bonds or T-bills, which are basically IOUs to the buyer, and increase our national debt. As long as we have deficit spending - that is, spending more than the government takes in from taxes and other revenue sources-the total debt goes up every year. Reaching the debt ceiling does not immediately cause a government shutdown, but that could follow soon after during a time of deficit spending.

The U.S. debt limit is currently $14.3 trillion. Since March 1962, the debt ceiling has been raised 74 times, 10 of which have occurred since 2001. How close are we to reaching the current debt ceiling?

In a letter to Congress on April 4, 2011, Treasury Secretary Timothy Geithner informed the legislature that "The Treasury Department now projects that the debt limit will be reached no later than May 16, 2011." He further stated that "The longer Congress fails to act, the more we risk that investors here and around the world will lose confidence in our ability to meet our commitments and our obligations."

Raising the debt limit repeatedly is not by itself a problem because simply having a growing national debt does not cause problems anymore than having a mortgage causes problems for a consumer. It is only when that debt limit is out of balance with one's income that it becomes a problem.

The national income is best measured by a statistic called GDP (Gross Domestic Product), so economists track the debt as a percentage of GDP. It is currently at around 100 percent of GDP, which is almost as high as it has ever been (exceeded only during World War II). Furthermore, the national debt is projected to grow quickly in the future if the growth of entitlement programs such as Medicare and Social Security are not reduced.

One idea for avoiding the political trauma of having to raise the debt ceiling so frequently is to change the statute to limit it as a percentage of GDP instead of an absolute dollar amount. Congress could agree to a cap on federal spending as a share of gross domestic product or set a target for holding the public debt below a certain share of GDP. This concept was suggested by President Obama's bipartisan fiscal commission, but does not appear likely to become law anytime soon. The political parties seem to thrive on the political theater of brinksmanship that comes from frequent looming crises, such as government shutdown or the debt limit being reached.

Sources:

"Face the Nation," CBS Television, April 10, 2011

"Meet the Press," NBC Television, April 10, 2011

Slate.com http://slatest.slate.com/id/2290921/ retrieved April 10,2011

US Treasure Department web site: http://www.treasury.gov, retrieved April 10, 2011

CNN Money: http://money.cnn.com/2011/01/03/news/economy/debt_ceiling_faqs/index.htm retrieved April 10,2011

http://www.usgovernmentspending.com retrieved April 10, 2011

Christian Science Monitor March 8, 2011 http://www.csmonitor.com/USA/Politics/2011/0308/National-debt-ceiling-101-Is-a-crisis-looming/What-would-fiscal-hawks-like-to-achieve-in-return-for-raising-the-ceiling