Gazing At The Ceiling
“Oh what a feeling, when we’re dancing on the ceiling.” – Lionel Ritchie
The “debt ceiling” is back in the news again. A lot.
According to Treasury Secretary Janet Yellen, the U.S. is expected to “run out of money” in early June, due to the debt ceiling. But what, exactly, does that mean?
The debt ceiling is a legislative mandate stating the maximum amount of outstanding debt the U.S. can incur. For some historical background, prior to the existence of the debt limit, Congress needed to approve each debt issuance by the Treasury. The debt limit was “created” in 1917 to allow borrowing without congressional approval, simplifying the financing of mobilization efforts during World War I.
Somewhere around the 1950s, the political parties began to use the limit as a political weapon in budget battles. Raising the debt ceiling doesn’t authorize new spending – it simply allows the Treasury to pay expenses that have previously been authorized.
What does the ceiling accomplish? It hasn’t been very “limiting” historically. The national debt has increased under every president since Herbert Hoover. The debt limit has been raised 100 times in 82 years (per USA Today), including 18 times under Reagan (the presidential record). By administration, the ceiling was raised 56 times under Republican presidents and 44 under Democrats.
What if an agreement to raise the ceiling is not reached? It gets awfully messy. Some have argued that the government could prioritize certain payments over others (e.g., to bondholders). But that may not be workable. Others believe the 14th Amendment provides a way to bypass the issue, since it addresses “the validity of the public debt.” But, it’s rather obscure language and could certainly be challenged in court. These are not ideal solutions.
Without sufficient government funds to pay expenses, a lot of people would be impacted: Treasury bondholders, federal employees, soldiers, Social Security and Medicare recipients… not to mention effects on the economy and financial markets. Causing pain for the vast majority of voters due to bipartisan bickering doesn’t seem like a great political move for anyone involved.
The bottom line is that delayed government payments will have an outsized impact on the less fortunate – those that rely on the money to meet their daily needs. The backlash for withholding such payments would be swift, and grow more extreme with each passing day. For those with a healthy financial position (like clients of LPP), the disruption is not likely to have a lasting impact, and would presumably be short-lived.
It’s always within the realm of possibility for politicians to make a mess of things like this, but it’s also in their best interest to fix the matter quickly. It’s newsworthy, but it’s not worth losing any sleep over. This too shall pass.
