What is going on with the U.S. debt?

Dr Alexandros Kyriakidis[1]

Introduction

It is common for the public debt limit (or “ceiling”) of the United States of America (U.S.) to be the subject of political controversy if its completion is imminent in a period that Congress and the Presidency belong to different parties. This is the case now too, with the debt limit to be reached in just a week, and with the Republicans holding the majority in the House of Representatives and the Democrats the majority in the Senate and the Presidency after the 2022 midterm elections. But how does the debt “ceiling” becomes a highly politicized issue?

Public debt and the U.S. Constitution

Section 8 of Article I of the U.S. Constitution provisions, inter alia, that Congress alone can “borrow money on credit of the United States” and “to pay the Debts …  of the United States”. In June of 1868, just one year after the end of the Civil War, the 14th Amendment to the U.S. Constitution was adopted, the first sentence of Section 4 of which (Public Debt Clause[2]) states that “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.” The purpose of the Amendment was primarily to ensure economic stability and protect U.S. public finances, particularly in view of the inclusion of the southern States in the Union after the Civil War, (Democratic) representatives of many of which were opposed to the federal government assuming the war debts incurred by the North, as opposed to Republican representatives of the Northern States  who were in favour.

The debt “ceiling”

In accordance with the above constitutional provisions, Congress has always limited the capacity of the federal government to borrow. Prior to 1917, this was achieved by Congress alone designing all U.S. securities[3], granting only limited authority to the Secretary of the Treasury to manage the debt that was of a certain amount, for a specific purpose.  etc.

The public debt ceiling was introduced as a horizontal restriction by Congress on federal government borrowing for the first time in 1917, when the U.S. issued the so-called Liberty Bonds to finance its participation in, and support for the Allies during, World War I, with the limit set to about $7.5 billion (about $70 billion in today’s prices). The Second Liberty Bond Act of 1917 abolished the preexisting restrictions, allowing the assumption of debt by the U.S. government (now by the Treasury) with the only (legislative) limitation being the debt limit.

The limit is currently legally provisioned in sections 3101 and 3101A of the U.S. Code  and is the limitation, by  an Act of Congress, in the amount borrowed by the federal government to service existing (not new) obligations. Since 1917 it has been increased, temporarily extended, or modified 78 times, and now stands at about $31 trillion.

Reaching the respective limit results in the inability of the U.S. government to borrow to serve existing needs, potentially even leading to default. The Department of the Treasury may take extraordinary measures (e.g. by suspending investments of the Civil Service Retirement and Disability Fund), but these are usually only sufficient for a period of months. Indicatively, when the limit was reached in 2013, the failure to reach an agreement led to  the suspension of  nearly all federal government services for 16 days and the of more than 800,000 federal civil servants. Therefore, upon reaching the limit, the fact that the functioning of the country itself is at stake creates fertile ground for political negotiations between Democrats and Republicans.

The current situation

The current limit has  already been reached since January, making further borrowing impossible and forcing the Treasury to take extraordinary measures to avoid a possible default. But those measures will last until early June, yielding an immediate to suspend or increase the limit through congressional legislation.

On April 26, the House, with a Republican majority, approved a Bill to raise the limit, but it also includes other political priorities of Republicans, such as cutting federal programs (e.g., “green” taxes and student loans) and adding eligibility criteria for qualifying for benefits or federal programs, such as introducing a requirement to work at least 80 hours per year  month, or a specific minimum wage, to become eligible for the Medicaid. Given these additional provisions, the Bill has little chance of being approved as it stands by the Senate, in which the Democrats hold the majority. But it has formed basis of the Republicans for the political negotiation that, after months  of refusal by the incumbent Democratic President Joseph R. Biden,  finally began in mid-May and culminated in an agreement in principle two weeks later. 

Negotiation and agreement are inevitable for both political parties. As for the Democrats, considering that the President is, in essence, the head of the political system of the country in the eyes of citizens, he, and by extension the Democratic party, will bear most of the responsibility for any suspension of federal government operations, and the ensuing dissatisfaction, in the event of no deal. But Republicans will also take a share of the blame — albeit less than Democrats — by appearing intransigent in the face of a possible default of the U.S. Given the upcoming 2024 presidential election, in which both incumbent President Biden and former President Donald J. Trump will run, both parties want to maintain their party base cohesive while avoiding actions that could alienate voters who are in the center or are undecided, who are an important part of the electorate for the U.S. elections.