The Origins and Current State of the Debt Limit (or Debt Ceiling)
The debt limit (or debt ceiling) is the total amount of outstanding debt that the US Department of the Treasury can incur. The so-called “X-date” is the day on which the Department would no longer be able to pay interest to bondholders on existing debt or to incur new debt if doing so would exceed the debt limit set by law. That day is fast approaching.
Some historical context to put the current debate about increasing the debt limit in perspective. In 1917, in order to help finance US involvement in World War I, Congress created the debt ceiling as part of a bill that authorized the Treasury Department to issue bonds and take on other debt without specific congressional approval–as long as the total debt fell under the statutory debt ceiling. Through the Second Liberty Bond Act, Congress set the debt ceiling at $15 billion.
As expressed in absolute dollars, the national debt has increased under every president since President Herbert Hoover. On the eve of World War II, the national debt had reached $49 billion. In 2021, Congress approved a joint resolution signed into law by President Joe Biden setting the statutory debt limit at $31.381 TRILLION.
On January 19, 2023, Treasury Secretary Janet Yellen notified Congress that the federal government’s outstanding debt was projected to have reached the statutory limit. She therefore indicated that the Treasury Department had commenced using “extraordinary measures” to avoid breaching the $31.4 trillion limit. In fact, the Treasury Department came within $25 million of breaching the ceiling.
What are “extraordinary measures” and how long can she use them? In essence, extraordinary measures are actions undertaken to reduce what counts against the debt limit, such as suspending certain types of investments in savings and health plans for government workers. The Treasury Department also can temporarily move money between government agencies and departments to make payments as they come due. And it can suspend the daily reinvestment of securities held by the Treasury’s Exchange Stabilization Fund, a bucket of money for buying and selling currencies and providing financing to foreign governments. In this instance, Secretary Yellen said she would redeem existing investments and suspend new investments in the Civil Service Retirement and Disability Fund and the Postal Service Retiree Health Benefits Fund. Further, she suspended reinvestment of the Government Securities Investment Fund of the Federal Employees Retirement System Thrift Savings Plan. These measures will be in place through June 3. A few days later, Secretary Yellen announced some additional extraordinary measures to buy more time. But time is now about up.
Secretary Yellen has repeatedly warned Congress that the “X-date” is fast approaching. Because the date depends on tax revenues coming into the Treasury Department, tax refunds sent to taxpayers, and dwindling opportunities to use “extraordinary measures,” the Department can only estimate how soon it will arrive. By most estimates, the X-date will arrive by no later than June 10.
Congress could have taken a variety of actions before now to address the issue:
- Congress could have passed legislation simply “suspending” the debt ceiling for a defined period of time, from a few months to a few years. House Republicans, for example, could have voted to suspend the ceiling until September 30 to tie a further debt ceiling vote to Fiscal Year 2024 spending with the hope that the White House and Senate would go along.
- Congress could have passed legislation raising the debt ceiling to a substantially higher amount, which many House Republicans are loath to do without getting a commitment from the White House to substantially cut spending. No doubt reflecting his experience as Vice President in 2011, President Biden had been adamant that he would not do so. Setting a red line, he has repeatedly said he will not even discuss that option – and doubled down on his position in his State of the Union Address. That position is getting harder for him to maintain, as the White House is now fully engaged in negotiations that appear to tie a reduction in spending to an increase in the debt ceiling.
- To provide support for the President’s position, Senate Democrats could have sought to approve a clean debt ceiling extension to put the onus on Republicans.
- Congress could have passed a bill explicitly prioritizing the payment of obligations coming due, such as paying off bonds as they mature, continuing to fund Social Security and Medicare and funding the military. (As noted below, the Treasury Department might already have that authority but appears to be reluctant or unable as a practical matter to use it.)
- Congress could have set the debt limit as a percentage of Gross National Product (GNP) or simply repealed it altogether, but that has not been in the cards.
Given the intransigence of House Republicans, what options does President Biden have now?
- The President could simply declare that the 1917 law is unconstitutional and direct the Secretary of the Treasury to ignore the debt ceiling. Professor Laurence Tribe recently made the case for doing so in a New York Times op-ed. In essence, the argument is this: The President has a constitutional duty to “faithfully execute the law” by implementing all spending bills enacted by Congress—including those that would exceed the debt ceiling. Since the debt ceiling stands in the way of his executing this constitutional duty to spend money appropriated by Congress, he would argue that he can ignore the debt ceiling.
- The Administration also could go into court to seek a declaratory judgment that the law is unconstitutional based on that argument or other ones that have been developed by his lawyers. One of the unions representing government workers already has filed suit, arguing that the law is unconstitutional. The Administration could seek to intervene in the case, but it is highly unlikely that the District Court will rule before the X-date.
- The Administration could “prioritize” making debt-service payments before paying other bills as they come due (such as paying bondholders before making payments to agencies to cover government worker salaries). Secretary Yellen appears to have concluded that the Treasury Department is not able to do so, saying that its “systems are built to pay all of our bills on time and not to pick and choose which bills to pay.”
- The Administration could “roll over” current debt obligations. When the Treasury Department pays off maturing debt, the amount of debt subject to the statutory limit declines by an equal amount. Thus, the Treasury Department could issue new debt to pay off old debt—without exceeding the debt limit. In 2011, the Treasury Department reportedly made such a plan during the showdown over the debt limit between President Barack Obama and Speaker John Boehner.
- To preserve cash, the Treasury Department is asking other agencies whether they could delay making large payments. The goal is to get to June 15–when the next round of quarterly tax payments would arrive and thus push the X-date into July.
- The one thing the Treasury Department almost assuredly will not do is direct the Bureau of the Mint to produce a “trillion dollar coin,” which then could be “deposited” in the Treasury’s account at the Federal Reserve. Secretary Yellen already has dismissed this gimmick. Federal Reserve Chair Jerome Powell has thrown cold water on the idea as well, saying: “There’s only one way forward here, and that is for Congress to raise the debt ceiling so that the United States government can pay all of its obligations when due.”
And so the clock continues to tick.