The debt limit nearly caused a financial crisis in 2011, and it could do the same under President Biden.
The debt ceiling is ridiculous. It’s a pointless federal law, and the last time a Democrat held the presidency, the Republican opposition in Congress (led in part by members still in power today) held it hostage and nearly brought the global economy to its knees. It is a ticking time bomb, and now that Democrats have the presidency and both houses of Congress, they should defuse it.
As it happens, they have just the tool needed to do so: the budget reconciliation process. The process, which allows the Senate’s 50 Democrats to pass legislation without being blocked by a Republican filibuster, has gotten a lot of deserved attention since Democrats took the upper house.
Less attention has been paid to the fact that reconciliation can be used to raise the debt ceiling, and Democrats can use it to effectively abolish the debt ceiling for all practical purposes by raising it by an amount so high that a breach won’t happen until far into the future. In doing so, Democrats have a chance to think long-term and prevent costly political and financial crises before they happen.
Democrats’ current control of both houses of Congress might make raising the debt ceiling seem not particularly urgent. Because you can raise the debt limit through reconciliation, Republicans cannot block Democrats from raising it to whatever level they want.
Currently the limit is suspended through the end of July, and the Treasury will be able to use “extraordinary measures” to avoid default for a few months even after that. With a pandemic and an economic crisis to combat in the meantime, it makes sense for the debt ceiling to not be the president’s or Congress’s highest priority.
But it should be a priority all the same. One day — maybe in 2023, maybe in 2025, maybe later — the US will be under divided government again. If the debt ceiling still exists then, chances are the party with a house of Congress but not the presidency will use it to force a crisis and extract concessions from the president. This is particularly true if the president is a Democrat; Republicans were very willing to hold the debt ceiling hostage under President Obama while Democrats were averse to doing so under President Trump.
Another debt ceiling crisis would be calamitous. In the best-case scenario, it could force the government to enact whatever bad policies (like across-the-board spending cuts) the hostage-taking party wants. In the worst-case scenario, it could spark a global financial crisis. It would also worsen inter-branch conflict in the US and lead to an escalation of “constitutional hardball” of the kind that’s corroding our democratic institutions.
Democrats in Congress can pass legislation that would prevent a crisis like that from happening again. It would take substantial political capital — but eliminating the potential for a serious catastrophe in the future is worth it.
The debt ceiling, explained in under 250 words
The debt ceiling in the US is, in international terms, very uncommon. Out of the OECD group of wealthy democracies, only Denmark and Poland join the US in having a hard legal limit on debt. Peer countries like Japan, Canada, the UK, France, and Germany get along just fine without debt ceilings. They just pass laws setting up their tax and spending policies, and issue debt to make up the difference.
The US is different. Congress has to both regularly pass tax and spending laws, and then manually update a score marker (the debt ceiling) and make sure it’s keeping up with those laws. And if Congress doesn’t keep up, the effects are incredibly dire. At “best,” the US stops making legally mandated payments, like salaries for members of the military or benefits for veterans. At worst, it stops making interest payments on existing debt, meaning the US goes into default, a move that could cause a global financial crisis.
In her evaluation of the effects of a debt ceiling breach, Beth Ann Bovino, chief US economist at Standard and Poor’s, wrote that “the impact of a default by the U.S. government on its debts would be worse than the collapse of Lehman Brothers in 2008, devastating markets and the economy.” A sudden cutback in government spending would cause a huge negative shock to GDP, forcing a recession.
The case for fixing the debt ceiling through budget reconciliation
The simplest way to change the debt ceiling is through normal legislation. But normal legislation can be delayed through a Senate filibuster, which requires 60 senators to break. Given that there are only 50 Democrats in the Senate, and Senate Republicans likely will be loath to pass legislation that reduces their bargaining power should they one day retake control of the body, abolishing or weakening the debt ceiling through ordinary legislation seems untenable.
The president could also try to de facto abolish the debt ceiling, through a variety of means. The zaniest by far would be to exploit a law passed in 1996, and meant to benefit coin collectors, that lets the secretary of the treasury issue platinum coins of arbitrary value. The treasury secretary could thus mint a coin valued at, say, $1 trillion or $2 trillion, and use it to purchase and pay off an equivalent amount of debt from the Federal Reserve, which currently holds $4.7 trillion in federal Treasury bonds. The move could trigger inflation by expanding the money supply, but it’d keep the US under the statutory debt limit.
Another, less zany move would be for the president to simply announce he’s not honoring the debt ceiling. He could argue that it’s unconstitutional under the 14th Amendment for the US not to honor its debts, and thus that the debt ceiling violates the Constitution; some eminent constitutional law scholars like Yale’s Jack Balkin have backed this argument. He could also argue that the debt limit contradicts other laws passed by Congress specifying a particular amount of spending and taxation, and announce that the “least illegal” thing for him to do would be to honor those spending and taxing laws at the expense of disobeying the debt limit law.
All of these options, however, would amount to a substantial usurpation of power by the executive. They also come with some legal risk, though it’s unclear who exactly would have the standing to challenge such actions in court.
And that brings us to the option I suggest here: raising the debt ceiling through reconciliation legislation. Less fraught than executive action, and more politically realistic than passing ordinary legislation, it’s an option that lawmakers should seriously consider.
Under Senate rules, the Senate can pass as many as three reconciliation bills per budget resolution: one that adjusts taxes, one that adjusts spending, and one that adjusts the debt limit. The reconciliation instructions in the just-passed budget resolution suggest that the same piece of legislation will affect taxes and spending together. The resolution did not include instructions for a change in the debt limit. But Congress could easily amend the legislation to include such instructions, or include them in the forthcoming budget for fiscal year 2022.
What today’s Democrats can do to effectively end the debt ceiling brinkmanship
Under a deal passed in the summer of 2019, the debt ceiling is suspended until the end of July. At that point, if the debt ceiling isn’t raised (and if Treasury doesn’t take extraordinary measures), the US would go into default, likely sparking a global meltdown.
Thankfully, that likely won’t happen — with both houses of Congress in Democratic hands, it’s all but certain that Biden and Congress will be able to raise the debt ceiling anew.
But Democrats have an opportunity right now to do much more than that.
To be clear, federal law suggests that reconciliation legislation — the type of legislation that will come out of today’s Congress — cannot suspend the debt limit until a certain date. It can only increase or decrease the amount of debt specified in the limit. Under Section 310 of the Congressional Budget Act, a reconciliation bill may “specify the amounts by which the statutory limit on the public debt is to be changed,” but not suspension or timing. And if reconciliation bills cannot suspend the debt limit, they certainly cannot abolish it outright.
Alan Frumin, who served as Senate parliamentarian — a nonpolitical expert who advises the body on procedural matters — from 1987 to 1995 and then from 2001 to 2012, affirms that interpretation, telling me in an email that reconciliation bills can raise but not abolish the debt ceiling. “My best guess is that the numerical value of the ceiling could be adjusted to any amount without violating the Byrd Rule, although it is possible that there could be a prohibited (non Byrd) budgetary effect of an increase to a certain level,” Frumin told me. “I also think that the statutory imposition of the debt ceiling per se could not be abolished in a reconciliation bill.”
If the current Senate parliamentarian, Elizabeth MacDonough, were to agree with this assessment, the presiding officer of the Senate (most likely Vice President Kamala Harris) could overrule it and declare that under reconciliation, the debt limit can be abolished entirely. But that would involve some procedural norm-breaking that Democrats may want to avoid.
However, there’s a way out of this bind. Call it the Danish option.
As noted above, Denmark is one of the few other nations besides the US to have a legal debt ceiling. But there, the ceiling is not really binding — and not just because the country has a parliamentary system with a single house of parliament that appoints the prime minister, meaning that conflicts between the prime minister and the parliament that elected them are rarer than conflicts between the US president and Congress.
The more important factor that renders is that in 2010, Danish lawmakers consciously raised the ceiling to 2 trillion Danish kroner, more than double the then-current debt level (and way above today’s level, too). The very purpose of this action, Danish economist and Peterson Institute for International Economics fellow Jacob Funk Kirkegaard writes, was to make the debt ceiling a non-factor for the purposes of legislating. The Danes raised it high enough that they didn’t need to worry about it for a long, long time.
Under the Danish option, Biden and his Democratic allies in Congress would raise the debt ceiling to a level high enough that they do not need to worry about it for the foreseeable future. The limit, once it’s un-suspended in August, is expected to be around $27 trillion. Congress could set it at $50 trillion or $100 trillion, or, if it wants to be extra safe, some preposterously large number like $1 googol (also known as $10^88 trillion).
That would effectively eliminate the debt ceiling as a hostage-taking device, at least for a good long while. True, it could also invite misinterpretation: Republicans could claim that Democrats voted to allow tens of trillions of dollars in new debt, which, while technically true, would be wildly misleading.
Sarah Binder, a professor of political science at George Washington University and expert on congressional procedure, notes that reconciliation has only been used four times to raise the debt limit (in 1989, 1990, 1993, and 1997). “My sense is that increased political heat over the debt limit has made reconciliation a less politically viable tool for raising the limit,” she writes in an email. “Not entirely sure why that is, except neither party typically wants to own the increase.”
But Democrats should not let that risk prevent them from disabling the ticking time bomb of the debt limit. There’s a real chance that Republicans will capture one or both houses of Congress in 2022. If they do, the odds of a debt ceiling standoff akin to the one that President Obama faced in 2011 will go way, way up.
America can’t afford to take that risk again. That’s why Jason Furman (who served as Obama’s chief economist) and Rohit Kumar, former domestic policy director for Senate Republican leader Mitch McConnell, united in 2017 to urge that the debt ceiling be abolished. Kumar and Furman were on opposite sides of the 2011 negotiations but agreed that a crisis like that could not be allowed to repeat itself. Senate Democrats have the power to eliminate the odds of another such crisis. They should use it.
Author: Dylan Matthews