How the debt ceiling became a game of political chicken that continues to threaten our economy

0

US President Joe Biden shakes hands as he presents a copy of his speech to House Speaker Kevin McCarthy of Calif., before he delivers his State of the Union address to a joint session of Congress, on February 7, 2023 in the House Chamber of the U.S. Capitol in Washington, DC.

Congress originally created the debt ceiling to control military spending.
Since the 1990s, Democrats and Republicans have leveraged the risk of a debt default to control the budget.
2023 has seen a debt ceiling standoff between President Joe Biden and Speaker Kevin McCarthy.

The debt ceiling isn’t new, but the brinksmanship is. 

After months of playing chicken, President Joe Biden and Speaker Kevin McCarthy have reached a tentative deal to raise the amount of debt the US can borrow and avoid a default that could wipe out the economic recovery from the pandemic, put 2.6 million Americans out of a jobtank the typical American’s retirement savings by $20,000, and hike payments on everything from student loans to mortgages. That economic crisis could arrive as early as June 5, if Congress doesn’t raise or suspend the debt ceiling.

Though we’re down to the wire, with a vote on the deal expected in the House Wednesday evening, it’s not always been this way. Congress created the debt ceiling in 1917 to control military spending as the US took on debt to enter World War I. Over the years, this “power of the purse” has been used to curb spending and limit the executive power of the president.

However, Congress turned this tool on itself in the 1990s when Republicans used the threat of default to force spending cuts from Democrats. Now a tool for negotiation within Congress rather than a check on the president, the Department of the Treasury has had to step in over and over to make sure US debt is safe for investment, keep the government running, and buy Congress time to raise the debt limit. 

These 15 slides cover how the debt limit has evolved into a tool for one political party to extract concessions from the other by putting the US on the brink of default time and time again.

1917: The debt ceiling was born in war
Advertisement of President Woodrow Wilson’s liberty bonds.

In 1917, shortly after the United States entered World War I, Congress passed the Second Liberty Bond Act to give the US Treasury Department the authority to issue bonds and other debt without congressional approval. That made it easier to finance military-industrial mobilization for going to war, the Bipartisan Policy Center reported.

Since 1776, Congress had to authorize each time debt was issued, even the specifics like how much the government would pay lenders back in interest and the length of time by which a bond had to be paid back.

The 1917 law gave Treasury broad authority to take on debt without congressional approval “to meet expenditures authorized for the national security and defense and other public purposes authorized by law,” so long as the total debt fell below the statutory debt ceiling.

1939: Congress set the first limit, then the second, third, fourth …
Bofors guns used by the Army and Navy are shown lined up at the Firestone Tire & Rubber Co. in Akron, Ohio, April 3, 1944. The company completed its 25,000th Bofors gun in two years of mass production.

In 1939, Congress consolidated limits on specific forms of debt into one aggregate debt limit, which they set at $45 billion, and gave Treasury wide discretion over how to borrow money so long as the federal agency did not exceed the debt limit, according to the Bipartisan Policy Center.

To fight World War II, Congress raised the debt limit each year to cover borrowing costs, reaching a peak ceiling of $300 billion before dropping to $275 billion after the war.

1957: Congress used the debt limit to pressure Eisenhower to make defense cuts
Major-General Dwight Eisenhower (1890 – 1969), commander of the American Forces in the European theatre of war, at the time of his promotion, by President Roosevelt, to Lieutenant General.

When temporary debt limit increases to help finance the Korean War expired, Congress refused to grant President Dwight Eisenhower renewed borrowing authority in 1957, instead waiting six months to increase the debt limit to pressure the Department of Defense to cut costs, according to the Bipartisan Policy Center. For a short period of time, the Air Force stopped paying its bills.

1979: Congress narrowly averted the first debt default
President Jimmy Carter speaking at Merced College in 1980.

In April 1979, an administrative error at Treasury forced Congress to raise the debt limit “with little time to spare before the federal government would have defaulted on payments for the first time in modern history,” the Bipartisan Policy Center reported. 

The incident delayed $122 million in Treasury payments, which may have led to a prolonged 60-basis-point increase in interest rates on US government debt.

In September of that year, the House of Representatives adopted the Gephardt Rule to automatically raise the debt limit by passing a budget resolution without a separate vote, directly linking federal borrowing to the budget for the first time. The rule was used to increase the debt limit 15 times before its 2011 repeal.

1985: Treasury first used extraordinary measures to stave off default
In this May 24, 1985 file photo, President Ronald Reagan works at his desk in the Oval Office of the White House as he prepares a speech on tax revision in Washington.

Facing another political impasse over raising the debt limit, Treasury implemented “extraordinary measures” for the first time in September 1985. By suspending certain investments to be made up later when the debt limit is raised, Treasury reduces the amount of debt these funds hold and keeps the government below the debt ceiling.

According to the Bipartisan Policy Center, the 1985 measures included “disinvesting” federal accounts like federal employee retirement funds and the Social Security trust funds without jeopardizing payments. These accounting maneuvers allowed the government to continue funding operations while buying Congress time to raise the debt limit from $1.9 billion to $2.1 billion. 

In October 1986, Congress authorized the Treasury Secretary to use extraordinary measures to prevent the government from exceeding the debt limit, allowing it to depart from normal investment practices for certain trust funds, though excluding Social Security.

1995-1996: Newt Gingrich’s GOP used the debt ceiling to force spending cuts
Speaker of the House, Newt Gingrich, talks about the passage of a $80 billion, five-year tax cut during a news conference on Capital Hill Saturday, Sept 26, 1998. At left is Rep. John Boehner, R-Ohio, Rep. Christopher Cox, R-Calif., and Rep. Bill Archer, left, R-Texas.

Between 1995 and 1996, the United States saw its first incident of debt ceiling brinkmanship.

In 1994, the GOP retook the House of Representatives after 40 years, emboldening Speaker Newt Gingrich to demand large spending cuts as part of his Contract with America, NPR reported. Bundling these cuts with a debt limit increase to prevent a default, the GOP-controlled Congress passed the Balanced Budget Act of 1995, but President Bill Clinton vetoed it.

Clinton said the GOP “failed to pass the straightforward legislation necessary to keep the government running without imposing sharp hikes in Medicare premiums and deep cuts in education and the environment.”

Without a budget to fund operations, the government shut down for five days in November and then 21 days between December 1995 and January 1996, furloughing almost 300,000 employees while another 475,000 continued to work without pay.

Though the government first shut down under Gerald Ford’s administration in 1976, followed by numerous shutdowns under Jimmy Carter and Ronald Reagan, this was the first time the debt ceiling was used as a bargaining chip over legislation.

To avoid hitting the debt ceiling in February 1996, Congress gave Treasury temporary special borrowing authority to keep Social Security payments flowing, eventually raising the debt limit to $5.5 trillion that March.

In the end, the GOP got their spending cuts in the Balanced Budget Act of 1997, which also raised the debt limit to nearly $6 trillion and whose budget surpluses made it unnecessary to raise the debt limit for several years, according to the Bipartisan Policy Center.

2006: Biden, Obama, and other Senate Democrats voted against raising the debt ceiling
Senator Joseph Biden, D-Del., right, and Sen. Barack Obama, D-Ill., confer during a Senate Foreign Relations committee hearing on Capitol Hill Monday, April 11, 2005, on John Bolton’s nomination to be ambassador to the United Nations. (AP Photo/Dennis Cook)

In 2006, Democrats, including then-Senators Joe Biden and Barack Obama, voted against a debt-limit increase to protest the Iraq War and tax cuts under the Bush administration, according to the New York Times.

To avoid a default and keep the government running, Congress raised the debt ceiling to nearly $9 trillion only after Democrats got $16 billion in additional spending for social, military, job safety, and home-heating programs in the $2.8 trillion election-year budget, the Times reported.

As president, Obama said he regretted his vote against raising the debt ceiling, realizing its importance to the global economy, NPR reported.

2011: The GOP forced Obama to cut spending to raise the debt limit and caused the first US debt downgrade
Former House Speaker John Boehner attends a ceremony to unveil a portrait of himself on Capitol Hill, Tuesday, Nov. 19, 2019 in Washington.

When the GOP took control of the House in 2011, Speaker John Boehner rebuffed President Barack Obama’s proposal for tax increases and demanded deep cuts to Medicare and Medicaid in exchange for raising the debt limit, which the US reached that May at $14.3 trillion. 

Days before the projected X-date when the Treasury said it could no longer take extraordinary measures to avoid a default, Congress and President Obama enacted the Budget Control Act of 2011, which gave Republicans spending cuts without tax increases and authorized a two-stage debt-limit increase to $16.4 trillion, the Bipartisan Policy Center reported.

Citing this “political brinksmanship” as evidence that the US government is less able to manage its finances, Standard & Poor’s downgraded the US credit rating for the first time ever, from AAA to AA+. Though the two other largest credit rating agencies didn’t change their rating of US credit, S&P’s downgrade showed Wall Street began to consider the previously unthinkable — that US debt isn’t risk-free as the government could fail to pay its debts.

That’s a big deal because the US Treasury market is one of the largest in the world and federal debt is used as collateral in nearly every major financial transaction without which credit would tighten and slow economic growth.

February 2013: Congress suspended rather than raised the debt limit for the first time
In this Aug. 23, 2008, file photo, then-Democratic presidential candidate Sen. Barack Obama D-Ill., appears at a campaign stop in Springfield, Ill.

After the US hit the debt ceiling again and Treasury stepped in with extraordinary measures, Congress and President Obama temporarily suspended the debt limit in February 2013 for the first time ever, according to the Bipartisan Policy Center. It allowed Treasury to temporarily keep issuing more debt to fund the government’s operations, delaying the partisan feud over cutting spending to raise the debt through that May.

October 2013: GOP forced a government shutdown to force Obamacare concessions
Former President Barack Obama.

In May 2013, Treasury resumed extraordinary measures to avoid a default because Republicans refused to raise the debt ceiling again without spending cuts, according to the Bipartisan Policy Center. They wanted to defund President Obama’s landmark Affordable Care Act, or “Obamacare.”

Gridlock over funding the government led to a 16-day government shutdown that furloughed 850,000 federal employees.

The shutdown ended in October 2013 when Congress reached a deal that would fund the government into January 2014 and suspend the debt limit again into that February, doing so just weeks away from the X-date when the US was expected to default. Republicans used the urgency to force Democrats to require income verification for those receiving subsidies under the Affordable Care Act.

“We’ve got to stop governing by crisis,” Obama said after signing the bill into law.

2014-2020: Congress repeatedly suspended the debt limit as the US came close to default

From the end of Obama’s second term through Donald Trump’s presidency, Congress repeatedly suspended the debt limit to keep funding the federal government each time Treasury’s extraordinary measures got close to running out and default loomed, the Bipartisan Policy Center reported.

2021: Republicans and Democrats set aside the filibuster to raise the debt ceiling
Senate Majority Leader Mitch McConnell and Senate Minority Leader Chuck Schumer

In August 2021, Treasury was once again forced to finance the federal government with extraordinary measures when the US hit the then-$28.4 trillion debt ceiling. According to the Bipartisan Policy Center, the uncertainty around the COVID-19 pandemic, release of government relief payments, and economic recovery made it unclear when the government would default.

Republicans vowed not to raise the debt ceiling when Democrats, with President Joe Biden in the White House and control of both chambers of Congress, wanted to pass their $3.5 trillion spending package

However, days from default in October, Democratic Majority Leader Sen. Chuck Schumer and Republican Minority Leader Sen. Mitch McConnell agreed to raise the debt limit by enough to punt the next showdown into December.

Hours before the December 15 default deadline, Schumer and McConnell came to a one-time deal that allowed Senate Democrats to unilaterally raise the debt ceiling by $2.5 trillion without the threat of a Republican filibuster that would stop it, sparing Republicans from having to increase the debt limit.

2022: Democrats failed to use their control of Congress and White House to raise the debt ceiling
Joe Biden handed the pen used to sign the Inflation Reduction Act of 2022 into law to Sen. Joe Manchin.

After Republicans narrowly regained control of the House in the November 2022 midterms, Democrats still controlled the White House and both chambers of Congress until the new Congress convened in January 2023. That lame duck period gave the Biden administration months to avoid another debt ceiling standoff with Republicans, who hinted before the midterms they’d use the debt limit to demand spending cuts.

Democrats would have been able to unilaterally raise the debt ceiling using the filibuster-free process of budget reconciliation, like they did earlier that summer when passing the Inflation Reduction Act.

Nonetheless, Democrats didn’t bother to raise the debt ceiling before they lost the House, bungling an opportunity to prevent a future showdown.

2023: The GOP holds the American economy ‘hostage’ with the debt ceiling to force spending cuts
House Speaker Kevin McCarthy holds the speaker’s gavel high after winning election as speaker of the House early Saturday morning.

When the US hit the $31.4 trillion debt limit on January 19, 2023, Treasury started using extraordinary measures to avoid a default and buy Congress time to raise or suspend the debt ceiling. Treasury Secretary Janet Yellen said those measures would last until June 5.

In January, Speaker Kevin McCarthy said cutting Medicare and Social Security spending was “off the table” but that cuts would have to be made somewhere to raise the debt ceiling.

In March, the GOP-controlled House narrowly passed a bill that would raise the debt ceiling by $1.5 trillion but cut $4.5 trillion from the federal budget by increasing work requirements on social welfare programs, banning student loan-forgiveness programs, and rolling back earmarked pandemic spending.

President Biden vowed to veto the bill, Meanwhile, McCarthy refused any short-term debt-limit increase to give negotiations more time.

At the end of May, Rep. Matt Gaetz, an outspoken conservative, told Joseph Zeballos-Roig, a Semafor reporter, that he and his conservative colleagues “don’t feel like we should negotiate with our hostage.

“We will continue to reject and call out this reckless hostage-taking from extreme MAGA Republicans,” Rep. Pramila Jayapal, chair of the House Progressive Caucus, responded.

Then, on May 27, Biden and McCarthy reached a tentative deal that would raise the debt ceiling while capping spending, increase work requirements to receive food stamps, and resume payment of student loans.

However, a number of House Republicans have already said they’ll vote against the deal.

Read the original article on Business Insider

​Politics, Economy, Features, Default, Debt Deal, Debt ceiling 2023, President Joe Biden, Kevin McCarthy, Sen. Joe Manchin, Obama, Donald Trump, Chuck Schumer, Mitch McConnell, Newt Gingrich  

Leave a Reply

Your email address will not be published. Required fields are marked *