What Is the Congressional Debt Limit? (with Phil Wallach)

Understanding Congress

The topic of this episode is: "What is the congressional debt limit?"

To answer that question we are once again speaking with Philip Wallach. He was the very first guest on this podcast, where we pondered why we need a Congress. Phil is a senior fellow at the American Enterprise Institute, and the author of the book, Why Congress, which was published by Oxford University Press in 2023. Phil also has written previously about the debt limit, which makes him the right person to ask: What is the congressional debt limit?

Kevin Kosar:

Welcome to Understanding Congress, a podcast about the first branch of government. Congress is a notoriously complex institution, and few Americans think well of it, but Congress is essential to our republic. It's a place where our pluralistic society is supposed to work out its differences and come to agreement about what our laws should be, and that is why we are here to discuss our national legislature and to think about ways to upgrade it so it can better serve our nation. I'm your host, Kevin Kosar, and I'm a resident scholar at the American Enterprise Institute, a think tank in Washington, DC.

Phil, welcome back to the program.

Phil Wallach:

Thanks for having me back.

Kevin Kosar:

Let's start by getting clear on what we're talking about. There are deficits and there is debt. How do these two things differ?

Phil Wallach:

It's a stocks versus flow kind of thing. Each year, we have spending and revenue—in almost all years in recent memory, we have more spending than revenue. That creates a deficit. So the accumulation of all of the past deficits is the debt. So the debt is our total of all the spending we've done minus the revenue we've taken in, and it is now officially north of $30 trillion.

Kevin Kosar:

So when the Treasury needs to issue more debt, it's got to sell bonds—basically, these IOUs that say, "Please give us money that we can spend now, and we'll pay you back later." Is that essentially what's happening when we're taking on more debt?

Phil Wallach:

Yeah. A bond is a legally obligating instrument, and debt put out by the United States government is considered the lowest-risk kind of debt instrument in the world. So the government is not just saying, "If we feel in a good mood, we'll pay you back,” but, “we are legally obligated to pay you back with interest." That's very valuable to investors. And of course, United States bonds form the gold standard of collateral used not only in this country but around the world in the global financial system.

Kevin Kosar:

So this leads us to an important point, which is that an executive agency called the US Treasury that is issuing debt, but it doesn't do it simply at the behest of the President. The President can't say, "Well, let's just issue as much debt as we want on this day of the week or during this year." We have a law that limits the amount of debt; that is, our legislature has a role here.

We keep finding ourselves—with some frequency—in a situation where Congress will run these yearly deficits where they're spending more than the revenue coming in, and the debt grows and grows. Then, when we hit this legally mandated limit, Congress has to vote to pass a new law so that the limit is set higher so that more debt can be issued.

So let's just turn back the clock. This practice of setting a debt limit by law: why do we have it, and when did Congress first start doing it?

Phil Wallach:

Okay, so go back to the Constitution. Article I, Section 8 lists Congress's powers and pretty clearly gives the power of the purse to Congress. So Congress is responsible for making decisions about spending and taxation, and it's also, therefore, responsible for making decisions about financing deficits.

Through the 19th and early 20th centuries, whenever the Treasury wanted to sell debt, Congress would specifically vote to approve every single bond issue. Now, it didn't really think very hard about the way it did that; the Treasury Secretary pretty much came over and said, "This is what we'd like," and Congress generally said, "Okay, that sounds all right with us." But it was approving every single bond issue.

Now we come to World War I, and the federal government was spending money like never before, and Congress started to feel like this was too much of a burden for it to have to approve every single bond issue. So instead, in 1917, it put in place a ceiling, a limit. So up to this amount, Treasury can issue bonds as it sees necessary, and then once it hits that amount, it's going to have to come back to Congress. Congress will have to raise the ceiling, and the process involves the legislature again. But they put in place a dollar limit, and periodically raised that.

Somewhere around World War II, it took a modern statutory form. And ever since then, Congress has been raising the debt limit periodically, because we keep accumulating more debt such that if we didn't raise the limit, the Treasury would find itself unable to service the debt (i.e., unable to meet all of the obligations that Congress has incurred).

Kevin Kosar:

Is the United States unusual in having this debt ceiling policy where the legislature has to enact an increase to the debt periodically?

Phil Wallach:

Yes. It's not a normal thing for countries to have. In most countries, debt issuance seems to be thought of as a ministerial function of the Treasury Department, and not something that the legislature involves itself in so much. This is another aspect of America having an unusually powerful legislature that gets involved in more activities than legislatures in most countries do. But it is fairly clearly rooted in the Constitution that the US Congress has to be involved.

Now, it could just raise the limit really high. It could put in some sort of default rule that as long as we've passed spending laws, we're automatically authorizing the Treasury to sell enough debt such that we can spend all that money that we have voted in approval of. But we've never done that yet, so the debt limit has been the way we've coped with this congressional involvement for the last century.

Kevin Kosar:

It's worth pausing here to point out that the function of spending seems to have three big legislative steps. Congress passes a law to authorize spending on a program, an agency, etc. Then, Congress passes another law to appropriate the actual dollars that the executive agency can spend. But if the aggregate amount of those dollars exceeds the amount of revenues, you're going to have to take the next step to borrow. And in the olden days, as you referenced—a hundred years ago and earlier—Congress would just regularly pass these things ad hoc.

But that became such a frequent thing, it probably made very little sense to spend that much time on the floor of both chambers pushing those bills through. So they just set a higher number and put it there. That still is a third step. So instead of doing this third step every few weeks or every few months, every year or so we have to go through this debt limit situation.

Phil Wallach:

And it's not always so newsworthy, because sometimes neither party is all that interested in fighting over it—Congress puts through a raise of the limit in a bipartisan manner, and life goes on as before. So it doesn't have to be a moment of drama.

But ever since the standoff in 2011 especially, there's been a lot of attention to the debt limit, and a lot of sense that this is just a fight waiting to happen every time we come up against it.

Kevin Kosar:

We often hear the demand by some elected officials—presidents, members of Congress, etc.—that they want to "clean debt limit increase". What do they mean? And are these "clean increases" the norm?

Phil Wallach:

So a clean increase would be if legislators introduced a bill that was very short and very simple, and all it did was raise the amount of money that the debt limit is set at. Or something they've resorted to in recent years is: instead of choosing an amount, a dollar amount, they suspend the limit until a certain date. And that's a different way of getting at the same thing of saying, “We're going to be able to issue the debt we need through this time period instead of up to this amount.” And so Congress has sometimes passed bills that are more or less “clean increases.”

I wouldn't say that's the norm, though. Most of the time, whoever is not in the White House uses debt limit raises as a chance to hold the White House's feet to the fire a little bit on spending that they don't like, or on debt accumulation generically. If you go back to 2006, for example, the Democrats gave the George W. Bush administration a bit of a hard time on raising the debt limit then. It wasn't a big fight, in the end; the Republicans and Democrats got together and passed it in the end. But for example, Senators Joe Biden and Barack Obama, both voted against that increase as a way of showing that they were unhappy about some of the spending that the Bush administration had put through.

So historically, going back many decades, the party out of the White House has used it as a way of raising some protests. Some perennial fiscal hawks have used it as a chance to raise alarms about the growing debt in America, so usually, there's some kind of provision that needs to be attached to show, ‘we're concerned about the debt’ along with raising the debt limit. That's the norm, I'd say.

Kevin Kosar:

I think it's worth pulling back here for a sec and noting to listeners that when a bill is brought up for a vote in Congress, that bill is frequently comprised of multiple pieces of legislation that have been bargained out. They're put together as a package deal to build a majority. And other instances, a bill may be brought to the floor, but there's a shared understanding that other bills are also going to come hot on its heels, and they're going to pass. So they're not formally packaged together, but they're understood to be put together. And that's how you build the majority. So you can have a clean debt increase in theory, but you could also have another bill that's going to be coming in right behind it that is a product of bargaining with whoever is demanding a side deal of some sort.

Having said that, are these debt increase standoffs a bad thing? Is it bad for the legislators to bargain over this topic, seeing as debt and fiscal responsibility are important issues?

Phil Wallach:

It is a really strange way of trying to get control over our fiscal trajectory. It seems like the spending and revenue decisions that we make are the things that actually set the course of the debt. And then coming on the back end and arguing over whether we should raise the debt limit is kind of a strange way to say "that's how we should change the trajectory" because, in some sense, we all know that we have to raise the limit. We're not going to let the country default on its debt. And so it's a strange bargaining game where everyone knows that the outcome is preordained, at least in that aspect of it.

So the counterpoint, the reason why I would say a lot of fiscal conservatives say "We need to fight over the debt limit today and in the future" is that it's pretty much the only gut check we have in the system right now. We have the annual appropriations process, but that only gets at about a third of federal spending. A lot of federal spending is on autopilot at this point. Our budget process, which is supposed to force us to take stock of where we're going on an annual basis is—pretty much by all accounts—broken. It does not serve that sort of big-picture function, whatever else it may do. And so the moments when we bump up against the debt limit and we all know we have to raise it, they create the time when we could all get together and think about what's happening with the United States’ accumulation of debt, and what we need to do to change the path we're on.

Certainly, a lot of Republican legislators are very distressed about the fiscal path that we're on and want to do something about it. But again, it's a strange negotiation to have where, at the end of the day, everyone knows we have to raise the limit.

Kevin Kosar:

That's clear. Our current spending and revenue-raising practices are what are creating the deficits, and the compilation of deficits is what creates debt and brings up the debt limit as an issue. And so it seems sensible that we should just deal with that other problem.

But of course, the issue is we have this 50-plus-year-old Congressional Budget Act, about which everybody agrees that Congress is just not following the act. Reality and what the provisions of the laws say are just far apart. The incentive structure is all screwed up, so nobody's following it.

But to replace it is a huge lift. You have to get a law through both chambers. It means a lot of people's oxes are going to be gored. You've got appropriators, they don't want to give up their power. You've got Congressional Budget Committees. There are just a lot of players that you'd have to get. So the debt limit, to some degree, is like a proxy for that. And it's easy because it's a straight vote. It’s a single piece of legislation and you can take a symbolic stand on either side of it that might align with party branding or something like that. Is this dynamic, in some way, similar to the whole periodic fights we have over shutting the government down?

Phil Wallach:

Well, I think you hit on it when you said this is an opportunity to make a symbolic statement. I think that's, in a sense, the problem with the way that we do things now, which is that we have these fights around this largely symbolic matter and we don't actually force ourselves to get to the substance in any searching way. I think it's so much easier to let things go on the way they are going than to figure out a way to reduce deficits and debt. It's just so much less resistance.

And we don't have an imminent fiscal crisis in the sense that we're not drowning in our interest payments right now. I think the inflation of recent years actually makes the problem a little less acute, but we don't have any incentive to buckle down and fix things. And these problems get worse year by year when we think about where we'll be in about a decade when we've run into some very big problems with funding Social Security and Medicare under the current arrangements. And we're going to have a whole lot more debt by then because—these days—we run these roughly trillion-dollar deficits every year. It's an ugly picture, and we need to find some way of getting at the substance of it.

And the folks who are enthusiastic about debt ceiling fights think that the debt ceiling is the tool that we can use to get at that substance. I'm just a bit skeptical. I think the track record over the past few decades when people have zealously pursued some of these debt ceiling fights is not good. We haven't stopped accumulating debt. We haven't gotten to the substance in any really meaningful way. That's what worries me.

Kevin Kosar:

Should we just give up on these big battles around the debt limit and just either repeal the need to have one, or just set it at a gazillion dollars? Or is there something else we should do?

Phil Wallach:

Gazillion is not a real number, Kevin, and so that might be legally problematic.

I'm inclined to think that we should work hard to take the debt limit off the table, but—in the process of doing so—put in some other mechanism that really forces us to reckon with the debt and to debate the debt in a meaningful way on an annual basis. But it's not entirely clear what that mechanism would be, and revamping the whole budget process, as you alluded to earlier, is a really big lift.

But I think we need to squarely confront the fact that the current system is broken. The current system includes this debt ceiling element that really doesn't fix everything, causes real distractions, and of course causes this risk that maybe we might default on our debt, which would be really perverse. So to my mind, we need to push for some better way of handling our fiscal processes. We do need to recognize that things are broken now and that we're on a bad trajectory. Just having more debt ceiling fights doesn't really seem like a way of getting to a better place.

Kevin Kosar:

Philip Wallach—author of the book, Why Congress—thank you for explaining to us the Congressional debt limit.

Jeff Pickering:

Hello, this is Jeff Pickering, Director of Academic Programs here at AEI, and host of the Campus Exchange podcast. I want to take a moment to tell you about AEI's 2023 Summer Honors Program. This annual program is a unique, all-expenses-paid experience for undergraduates to study the pressing issues of our day with AEI scholars and other policy experts. This program will bring a couple hundred undergraduates from campuses across the nation and the world for weeklong seminars taught throughout the month of June.

Some of the courses we're offering this June will cover “The Changing Nature of Warfare,” taught by AEI's Kori Schake; “Polarization and Pluralism” with David French of The New York Times; and “The Foundations of Democratic Capitalism” with AEI's Michael Strain. In addition to time in the seminars, students will also have opportunities to connect and network with other students, young professionals, and other experts across the political and policy spectrum.

If you are a current college student or someone who may be interested, head on over to aei.org or Google "AEI Summer Honors" to learn more and apply. Applications are due March 15.

Kevin Kosar:

Thank you for listening to Understanding Congress, a podcast of the American Enterprise Institute. This program was produced by Jaehun Lee and hosted by Kevin Kosar. You can subscribe to Understanding Congress via Stitcher, iTunes, Google Podcast, and TuneIn. We hope you'll share this podcast with others and tell us what you think about it by posting your thoughts and questions on Twitter and tagging @AEI. Once again, thank you for listening, and have a great day.