What is the Debt Ceiling?


Congress passed the Second Liberty Bond Act in 1917 in order to give the secretary of the Treasury more freedom to issue debt instruments to raise money for World War I and pay for day-to-day government operations. Critically, the Bond Act obviated the need for the Treasury secretary to receive congressional approval for every single issuance of debt. That's no way to run a war. The trade-off for this freedom, however, was a self-imposed limit for the total amount of outstanding debt the Treasury could owe to the public and government agencies. 

Today's debt-limit or "debt-ceiling" is set at $16.394 trillion and was raised during last year's budget negotiations which culminated in the Budget Control Act. Outgoing Treasury secretary Timothy Geithner has said that the Treasury Department will reach its limit to borrow from the public in order to pay for government operations and obligations by mid-February or early March. 

When Congress passes legislation to, inter alia, establish social programs like Medicare or Social Security, it agrees to the monetary value of benefits and to whom those benefits are due. When the U.S. initiated wars in both Afghanistan and Iraq, Congress had to approve declarations of war. The Treasury Department is the professional governing body charged with the responsibility of paying for these obligations if annual revenues are less than expenses. Deficits are the difference between annual expenses and revenues, and if that difference is negative ... if the government must spend more than it earns ... then the Treasury Department must issue debt to the public in order to pay for that difference.

When issuing debt, the Treasury sells short-term bills and notes, and medium-to-long term bonds. All of these different debt instruments confer different interest payments on those who pay the Treasury short-term cash in return for the debt securities. These interest payments are paid when these debt instruments mature and the maturity schedules of all of these instruments range from a couple of days to 30 years. This type of debt is publicly owned by, and traded on the market between, domestic and international investment firms, individual investors, etc. Of the approaching $16.394 trillion national debt the U.S. owes, roughly $11.5 trillion is owned by the public.

The remaining $4.8 trillion (approximation) is held in governmental accounts of specific trusts like the Social Security, Medicare, and Civil Service Retirement and Disability Fund trusts. These groups make payments to beneficiaries periodically. If any one of these trusts needs to make payments which exceed the amount of taxes they receive during the month or year, then the Treasury Department converts debt held by these trusts into cash. 

Simply put, the Treasury Department continuously finds cash to pay for day-to-day government operations and medium-to-long-term obligations that Congress has already approved. However, faced with persistent deficits, the Treasury must find short-term cash in exchange for debt that incurs an interest payment on the U.S. later in the future. A helpful analogy will illustrate the Treasury's job ....

Whenever a ruler chose to annex or conquer foreign land in the distant past, he or she would call upon the empire's most talented general(s) to do so. The level of involvement the emperor or ruler would accord himself during the planning of the invasion varied throughout history. Augustus Caesar trusted Agrippa enough to handle most strategic considerations. The Eastern Roman Emperor Justinian had little to no say in the strategic and tactical considerations Belisarius had to make in order to re-conquer the then defunct Western Roman Empire (particularly because events developed chaotically and presented Belisarius with unforeseen opportunities). And the German Fuhrer Adolf Hitler infamously disregarded the advice of his Prussian military staff in order to implement what he thought to be sound logistic and operational plans for the invasion of Soviet Russia. Especially in the case of Belisarius, the Emperor Justinian gave his general a goal and then fully relied on Belisarius to devise his own plans and take advantage of developing opportunities in order to achieve that goal of re-conquering the west. Belisarius was more or less successful when considering the Herculean task that lay ahead of him, but he, as a strategic and tactical professional, knew that his success would rest firmly on the freedom accorded to him by the emperor to make the strategic decisions to achieve the emperor's goal.

And so, with the use of some simplistic logic, we are able to appreciate the responsibilities of the secretary of the Treasury. Congress passes legislation which either approves, or rejects, governmental goals and it is the duty of the Treasury Department to find the most cost-effective means of paying for those goals as the situation allows. While there are standing committees like the House's Budget Committee to judge congressional goals against budgetary constraints, congressmen often disregard or flat-out rebel against budgetary realities in order to garner favor and secure votes for re-election. I could write a book about budgetary politics, and many people have, but the intent of this essay is to explicitly identify the logical inconsistency of passing legislation with no consideration of costs, asking the Treasury Department to secure funding for that legislation, but also imposing a limit upon that Department's freedom to meet the obligations the legislature has imposed upon itself. 

This article is an expository treatment of the debt-ceiling and should serve as a primer to debate.