HISTORY OF THE DEBT CEILING & MORAL ISSUES OF THE NATIONAL DEBT AND BUDGET PROCESS IN AMERICA
April 3th, 2023?
ECONOMIC NEWS OF THE 1st QUARTER, 2023?
HISTORY OF THE DEBT CEILING?
THE MORAL ISSUES OF THE NATIONAL DEBT AND BUDGET PROCESS IN AMERICA?
STAPLES CONSULTING??
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HISTORY OF THE DEBT CEILING?
?First a trivia note, there are 195 nation-states in the world today; of these only two make use of a debt ceiling, Denmark and the United States. This might be another example of America’s (negative) exceptionalism. The Danes debt ceiling is set so high that it could not be reached any time soon. If we compare their debt ceiling to the United States, our debt ceiling would have to be set at over $53 trillion (presently our debt ceiling is at $31.381 trillion); where currently we have a political show about raising our debt ceiling every few years, it would take more than 10 years with current deficit projections to match the Dane’s limit!???
The debt ceiling, or debt limit, is the limitation or restriction on the federal government’s ability to pay it bills, allocate funds for future investment, and manage the economy and finance system of the United States. With the exception of the years of 1835 and 1836, the United States has continuously had a national public debt. The national debt, as expressed in absolute dollar terms, has increased under every presidential administration since Herbert Hoover, starting in 1930.?
?Our first official debt ceiling was established in 1917, during the First World War, with the passing of the Second Liberty Bond Act of 1917. Prior to this the United States had no debt ceiling in force. Since the establishment of the United States Constitution on March 4th, 1789 and until September 24th, 1917 and the passage of the Second Liberty Bond Act, the United States Congress designed more than 200 distinct securities and designed each bond with the interest that was to be charged, as well as naming the purpose for the revenue raised. During any given year, between zero and eight federal securities were outstanding; with Congress authorizing each bond issue by the United States Treasury by passing a legislative act that approved the issue and amount. The United States first national debt amount was $75,463,476.52 on January 1st, 1791, then fell to technically zero during the fiscal years of 1835 and 1836, and today is set at $31,381,000,000,000.00.??
?It was after the United States entrance into the First World War (1917) that the government discovered that the old method of creating debt could no longer be done on a case-by-case basis. On July 1st 1916, (this was the start of the new fiscal year at that time) the national debt was about $3.6 billion, (this made the national debt to be less than 3% of United States Gross Domestic Product, GDP) and it had taken the United States 125 years to amass this amount of debt; by July 1st 1919, this had risen to $27.4 billion, so in just three years we had increased the national debt by 661%. Beginning with the Second Liberty Bond Act of 1917, Congress allowed debt to be issued by the Department of the Treasury without being tied to any specific purpose and gave it greater control over the maturity structure of the debt, as long the debt fell under the statutory debt ceiling; the first debt ceiling was set at $11.5 billion.?
?The next major changes to the debt ceiling were the passage of the Public Debt Acts of 1939 and 1941. The Public Debt Acts of 1939 was passed on July 20th, 1939, and created for the first time an aggregate limit ($45 billion) covering nearly all public debt. This Act gave the Department of the Treasury freer rein to manage the federal debt as it saw fit, including wide discretion over what borrowing instruments to use so long as total debt did not exceed the debt limit. This new debt limit of $45 billion was only about 10% above the total federal debt at that time, which was $40.4 billion. The Public Debt Acts of 1941 raised the debt limit to $65 billion, giving the Department of the Treasury more breathing room.?
?With the United States entry into the Second World War, the Public Debts Acts amended the aggregate debt limit because of the high cost of funding the fight against the Axis powers. In 1942 the limit was raised to $125 billion, in 1943 to $210 billion, in 1944 to $260 billion, and in 1945 to $300 billion. In 1946, the debt ceiling was actually reduced to $275 billion, where it remained for eight consecutive years, the longest such period during its lifetime (in 1946 the debt-to-GDP ratio hit a then record of 119%). The Korean War (1950-53), was completely financed through tax increases, so the debt limit didn’t need to be raised during these war years.??
?From the Public Debt Acts of 1939 (passed on July 20th, 1939) until the last time the debt ceiling was raised on December 16th, 2021 the debt ceiling has been raised 95 times, reduced 5 times (none of these reductions led to a lowering of the national debt), and suspended 5 times over these 82 years. President Ronald Reagan holds the record for most increases by any administration with 16 times, with the massive deficit spending and nearly tripling the national debt during his administration (1981-1989); followed by President Barack Obama tied for second most increases with 7, along with 3 suspensions of the national debt after the “Great Recession” of 2007-2009; and President George H. Bush (43) also having 7 increases of the debt ceiling (2001-2009). President Lyndon B. Johnson also had 7 increases of the debt ceiling, to finance the Vietnam War and the “Great Society” war on poverty (1963-1969). And, finally President James E. Carter also increased the debt ceiling 7 times (1977-1981). So we can see the debt ceiling has been raised almost routinely over the years, during both Democratic and Republican Administrations, and during war and peace times.????
?The debt ceiling was raised without any political wrangling until 1953. That is when the Senate upheld approval because President Eisenhower requested to have it increased to enable construction of the national highway system. Congress passed two additional temporary debt increases, until July, 1957 when the temporary increases expired and the debt limit reverted to $275 billion. Congress took 7 months to increase the debt ceiling as a means to pressure the Eisenhower administration to place more fiscal restraint on the Defense Department. During a short period the Air Force ceased to pay it bills.?
?The next substantial event for the debt ceiling was Congress passing the Congressional Budget and Impoundment Control Act of 1974 that created the modern congressional budget process, replacing the old process under the Budget and Accounting Act of 1921. This Act, which passed on July 12th, 1974, established a new congressional budget process, established Committees on the Budget in each House, established the Congressional Budget Office, and clearly stated that the budget process begins with the President. The White House releases its budget request during February that outlines the Administration’s recommendations and priorities. The House and Senate then begin work on their budget and establish a framework for the appropriators’ twelve spending bills, with the President still having veto power over the final results.???
?In April of 1979, Congress raised the federal debt limit with so little time to spare that technical and operational challenges delayed payments on nearly $122 million of Treasury bills. This possibly lead to a rise in the interest rate that was being charged on the national debt. There are conflicting studies on the impact to the financial markets; but if it did have any impact, one might worry on how such a small amount of an inadvertent temporary partial debt default could spook investors enough to raise interest payments significantly. (In 1981, the debt-to-GDP ratio had fallen to 31%, the lowest it had been in 50 years. Even though the national debt never dropped in absolute-dollar-terms, because the rate of growth of the economy was faster than the rate of growth of the national debt, the proportional ratio dropped.)?
To prevent any future delays in raising the debt ceiling this led to the passing of the parliamentary rule called the “Gephardt Rule” in September of 1979 (named after House Majority Leader Dick Gephardt). Instead of forcing a separate vote to increase spending, the federal debt limit was raised to the level specified by the spending of the House-and Senate-passed budget resolution. Between 1979 and 1995, and then again between 2007 and 2011 the “Gephardt Rule” was used to pass 15 increases in the federal debt ceiling limit. When the Republicans took control of the House of Representatives in 1995 and 2011 they reversed the “Gephardt Rule” requiring the need for separate votes on approving the budget and raising the debt ceiling.?
?In September of 1982, the federal debt ceiling limit was officially codified into Federal law. Before this, all changes in the federal debt ceiling were legislated as amendments to the Second Liberty Bond Act of 1917.?
?In September of 1985, the national debt hit the debt ceiling limit and for the very first time the Department of the Treasury implemented so-called “extraordinary measures.” These measures can best be described as accounting trickery including drawing down cash balances, skipping payments to federal pension or health benefits (like the Postal Service Retiree Health Benefits Fund), and temporarily disinvesting in the Social Security trust funds. This last measure, at the time, appeared to violate the Social Security Act. In October of 1986, Congress passed legislation legally permitting the Treasury Secretary to use “extraordinary measures” to prevent the government from exceeding the debt ceiling.?
?It wasn’t until October of 1995, that the debt ceiling and the annual budget process became really tied together and used for political goals. Once the Gephardt Rule was removed, the Republicans demanded $245 billion in tax cuts, welfare overhaul, restraints on Medicare and Medicaid growth and a balanced budget within 7 years. The Republicans passed in early November a bill increasing the debt limit-but only until the end of the year and passed a continuing resolution (CR) included higher Medicare premiums and other spending cuts. Then President Clinton simply vetoed both bills, and the government shut down twice-November 13th to November 19th, 1995, and December 15th, 1995 to January 6th, 1996.??
?Now a government shutdown is different from a debt ceiling crisis. Government shutdowns occur when Congress fails to enact funding legislation to finance the government for its next fiscal year or to pass a temporary funding measure called a continuing resolution (CR). Government departments must close unless they have surplus funds; they furlough non-essential workers. Employees that provide essential services (covering the safety of human life or protection of property) may be required to work without pay. All workers receive back pay once funding is approved.??
?The next debt ceiling crisis occurred in 2011, where debt ceiling negotiations between the President and Congress began to change in character (mostly for the worse). After lengthy discussion between the two branches of government a complex deal was reached, where a $900 billion increase in the debt ceiling was?
coupled with $900 billion in spending cuts. This became the Budget Control Act of 2011, passed on August 2nd, 2011. (On August 5th, Standard & Poor’s downgraded the United States government credit ratings to below AAA to AA+ for the first time in history.)?The deal was linked to the White House creating an unprecedented “super committee” charged with drafting the kind of agreement that had eluded every other previous government, increasing the debt ceiling by another $1.5 trillion and cutting spending by an equal amount. If this “super committee” failed, it would trigger a series of deep budget cuts known as sequestration that would slash funding across the government, from military spending to Medicare. Two weeks after the 2012 elections, the “super committee” disbanded without a agreement, triggering sequestration. In October, 2015 most of the deep cuts caused by sequestration were loosened on both defense and domestic spending.?
?In 2013, House Republicans returned with a new set of demands for raising the debt ceiling, which included the defunding of the Affordable Care Act. President Obama, seeing no progress on any “Grand Deal” on fiscal policy declined to negotiate; this led to a government shutdown that lasted 16 days. House Republicans eventually conceded, passing an increase in the debt ceiling.??
?In September, 2017 the United States debt exceeded $20 trillion for the first time, when President Trump signed a bill extending the debt ceiling to December 8th, 2017. In 2018, we had three shutdowns of the federal government over the failure of Congress to pass a CR to fund government operations. On January 19, 2018 for three days, on February 9th for a few hours, and on December 22, 2018 lasting 34 days until January 25th, 2019.?
?On January 19, 2023 the United States again reached the debt ceiling of $31.381 trillion (equal to about 120% of GDP). Using “extraordinary measures” the federal government will not default on its debt obligations until some time between June and September, 2023.?
?Over a hundred years ago, when the debt ceiling was first started it was to make financing the national debt easier and more efficient; it has now turned into a three-ring circus of showmanship, hyperbole, rhetoric, and bad economic and financial policies. No other nation follows the United States practice of having a official short-term debt ceiling; we should learn from them and just discontinue this policy and remove it from Federal law. If politicians are concerned about the nation’s debt, we have a annual budget process that can be used without the drama. But I guess that is what some politicians want, they want a soap box to blame the other guy, rather than to actually do some “real” work on solving the nation’s problem. Below is a short list of some of the bad ideas, about how to get around our current debt ceiling crisis.?
?LET’S DO A CONSTITUTIONAL CRISIS!?
?Some would argue that the President of the United States should ignore the debt ceiling and unilaterally issue new bonds using a provision of the 14th Amendment to the constitution which states that the validity of the American public debt “shall not be questioned.” The President would order the Department of the Treasury to issue new bonds in defiance of the debt ceiling. Opponents would challenge the President’s ability to take such action and the case would then end up in the Supreme Court!??
?THE TRILLION DOLLAR PLATINUM COIN IDEA!?
?In 1996, Congress directed the United States Mint to begin a commemorative coin program. The Mint was to produce gold and silver coins in denominations of $50 or less, no such limit was placed on platinum coins. The idea is for the United States Mint to create a $1 trillion platinum coin and deposit it with the Federal Reserve, would then credit the Department of Treasury account bringing the debt borrowed below the debt ceiling. This would allow the government to continue to borrow more money to cover it expenses.?
?LET’S OFFER 105% ON A ONE-YEAR BOND!!?
?The Treasury Department would issue ultra-high-interest bonds. Because only the face value of bonds are counted towards the debt limit, the Department of the Treasury would sell $1 billion worth of one-year bonds (hundreds of these would?need to be issued) with an interest rate of 105% for twice their face value (100% plus the current yield on one-year bonds). This would allow the Department of the Treasury to raise $2 billion in funding; they would then repurchase older debt. This would lower the national debt by $1 billion for each bond issued, letting the Treasury issue new debt to cover the government’s expenses.?
?PRIORITIZE PAYMENT-PAY WHAT WE GOT!?
?This would require the Department of the Treasury to prioritize certain payments over others, trying to mitigate financial and economic fallout. The Department of the Treasury would pay “high priority” claimants, such as foreign investors (like the Chinese and Japanese governments), debt to service payments, salaries for troops, and Social Security, Medicare, and veterans benefits and default to “low priority” claimants.?
?THE PROBLEM WITH THESE PLANS!?
?The difficulties with any and all of these ideas is the assumption that in some way we decide if the United States is in default or not. Instead it will be the marketplace that decides if the United States is in default! We can look to England to see how this might play out. Liz Truss was the shortest serving prime minister in the history of the United Kingdom (just 45 days in office). She was brought down after trying a Reaganomics plan for the U.K. of deregulation, the largest tax cuts in 50 years, and new spending.?
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This was a bold plan assuming that the tradeoff of higher growth would more than offset the risks from a big expansion of the deficit and debt at a time of high inflation and rising interest rates. This new budget plan was poorly received by the financial markets, with a sharp sell-off of British government bonds, a rise in interest rates, a rapid fall of the British pound, and a major intervention into the financial system by the Bank of England. When the marketplace decides that the United States is in default we can expect a similar response.?
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We need to remember that the debt ceiling was created to make the management of the national debt easier and more efficient. In 1917, the national debt was just 3% of the nation’s Gross Domestic Product (GDP). Because of the high cost of the “Great Depression” and World War 2 this percentage rose to 119% of GDP by 1945. With the rapid rise of the economy after World War 2 by 1981 this percentage had dropped to a post-war low of just 31%. It began to rise again after the introduction of Reaganomics in the 1980s, and peaked in 1996 at 64% of GDP before falling to 55% in 2001. The national debt exploded after this, rising to 120% by 2022; after the introduction of supply-side economics and the “Great Recession” during the Bush (43), Obama, and Trump administrations. Half of the United States national debt was created (over $16 trillion) during the 12 years of the Obama and Trump administrations (about half of this was created by the Obama administration and half by the Trump administration) and none of the political brinkmanship over the debt ceiling has done anything to actually control the growth of the national debt. It’s time to get rid of this archaic idea and use the normal budget process to manage revenue and spending!?
THE MORAL ISSUES OF THE NATIONAL DEBT AND BUDGET PROCESS IN AMERICA?
Today economists are taught that we are to think rationally, and analytically, to put aside moral judgment and thoughts. We are to use data and statistics for our arguments and put behind us our personal feelings about topics in economics. This I feel denies where our discipline started and that at times we need to make moral decisions about economic issues.??
?Adam Smith is recognized as “the father of economics,” but his first claim to being one of the great intellectuals of the Enlightenment was not as an economist, but as a moral philosopher. Smith’s first published work in 1759, was the book “Theory of Moral Sentiments.” Here Adam Smith explores ideas about individual freedom and self-interest, conscience and virtue. All of these ideas would later be incorporated in his influential work “The Cause and Effect of the Wealth of Nations (1776).” Smith personally believed that the Theory of Moral Sentiment was his superior work.??
?When we talk about our national debt and the budget process we do need to take into account some very important moral issues. Is it moral for one generation to create debt, in which it benefits, that the next generation must pay? And what moral hazard is caused by the government spending massive amounts of debt that saves businesses that should be allowed to fail????
?Adam Smith, as well as most classical economists, would agree that nations had to go into debt during periods of war for survival. They would also generally agree that governments, after the conflict is over, should run surpluses and pay down the debt; this is based on two basic arguments. First, Adam Smith and other classical economists recognized the real financial and economic problems that arose when nations were so indebted that they could not meet their financial obligations and had to default on their national debt. In the two centuries before the publication of the “Wealth of Nations” Spain and France (two of the most powerful nations in Europe at the time) had to default on their national debt. Spain defaulted in 1557, 1560, 1575, 1596, and 1627 during a period when they were extracting millions of dollars’ worth of gold and silver from the New World; and six more times in the 1700s. The French government often defaulted or unilaterally rescheduled debt repayments during the 1700s, including 1715, 1722, 1759, 1763, and 1772. The economic chaos and problems facing these nations were very real in the minds of the early classical economists, who realized that this situation needed to be avoided. (Of historical note: Most of Spanish and French debt was created because of endless wars that they fought during these centuries. The United States has been through a similar period. Unlike the Korean War (1950-53), where the United States paid for the entire war through a series of tax increases, 100% of the cost of the United States’s “forever war” in Afghanistan and Iraq was put on America’s credit card.)?
?The second argument against the government using or being in debt was twofold. First, classical economists believed that government spending money that was not raised by taxation was giving the current generation a free pass and putting a future financial obligation onto the next generation. It could be argued that spending on infrastructure (roads, canals, seaports, and later railroads and airports) could benefit future generations. But, in today’s budget this represents an exceedingly small portion of the total government spending. Also, as the debt increases more money must be spent on servicing that debt in the future. This means that future generations have less money to spend on their needs. Now if you hate your children or your grandchildren, this is a great plan to get even with them!!????
The other consideration is that it has been 23 years since the last time the growth in the economy has been greater than the growth of the national debt (as measured by the percentage of GDP). This is very different from between 1945-1980 when in most years growth of the economy was greater than the growth in debt. This is why the national debt was reduced from 119% of GDP in 1945 to just 31% of GDP in 1980. From 2001 the national debt was 55% of GDP and today its 120%. This means the federal government has spent 100s of billions of dollars every year more than it took in taxes, increasing the demand of goods and services; whereupon many companies have benefited from this deficit spending that keeps some companies afloat that should be allowed to die!?
To give you an idea of how bad our national debt has gotten below is a list of nations that are members of the Organization of Economic Cooperation and Development, (OECD-Nations that have a democratically elected government, follows the capitalistic model for their economy, and have a large middle-class population.) that have the highest percentage of national debt compared to the size of their economy, as measured by the Gross Domestic Product (GDP).??
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Nation Debt to GDP percentage (2020)
Japan 237.1%?
Greece 183.3?
Italy 132.1?
Portugal 121.4?
United States 120.0?
?This reminds me of an old Spanish Proverb, “Tell me the company you keep, and I will tell who you are!” None of these nations (our company here,) is what most people would consider to be dynamic economic engines; or models that we should be trying to copy. We really need to solve our national debt and budget deficit problems.?
?Now I realize that for the general population, it is hard to get good information about the government’s annual budget and its implementation. There are a large number of myths and misinformation on the internet today about all of this. I know of no politician of either party who provides to the voters simple, complete, and easy-to-understand information about the budget, what is in it, the process, and what has actually been proposed or what have legislators have done about the budget deficit. Keeping voters ignorant seems to be to their advantage.?
?Below is some general information about the budget and some things to consider about solutions to our problems!?
?One of the common themes on the internet today is that we have a spending problem in Washington, and that taxes are already too high. If we would just cut the fraud and waste out of the system, everything would be fine. No one needs to suffer. Let’s take a stab at reducing the budget deficit by using spending cuts alone.?
?Budget information from the fiscal year 2023-24 proposed federal budget.?
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Department Budget Employees?
?Health and Human Services $145.3 billion 79,500(2015)?
Veterans Affairs 137.9 billion 412,900(2020)?
Education ?90.0 billion ?3,900(2018)?
Housing Urban Development ?73.3 billion ?7,200(2021)?
State and International Programs ?70.5 billion 74,700(2020)?
Homeland Security 60.4 billion 240,000(2018)?
Energy 52.0 billion 107,400(2008,2018)?
Justice ?39.7 billion 113,100(2019)?
Agriculture ? 30.1 billion 105,800(2007)?
Transportation ? 27.8 billion 58,600(2021)?
NASA ? 27.2 billion 18,800(2022)?
Interior ? 18.8 billion 67,000(2022)?
Treasury ? 16.3 billion 87,300(2019)?
Labor ? 15.1 billion 16,900(2022)?
Commerce ?12.3 billion 46,600(2018)?
EPA ? 12.1 billion 14,600(2022)?
National Science Foundation ?11.3 billion ?? 1,700(2021?)?
Corps of Engineers ?? 7.4 billion 26,000(2021)?
Small Business Administration ??1.0 billion?? ? 3,300(2015)?
TOTAL $848.5 billion 1,484,400?
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Let’s consider what these cuts would mean in the “real” world.?
?We get rid of 13 Departments of the Federal Government. The National Institutes of Health is gone (we are never going to have another pandemic anyway). Department of Veterans Affairs is concerned with past soldiers, sailors, marines and airmen; not current military personnel, so it doesn’t really harm anyone we should be worried about. Education should not be a national concern, it’s a local issue only; its not like we have any global competitors out there. International Aid is just welfare for other countries and who needs soft power anyway. That’s why we have a military. We don’t need a Coast Guard, Secret Service, border control officers or NSA or CIA; just let everyone in and as there are no threats from other countries that we need to worry about. We don’t need the FBI, or federal prisons; we have the local police and jails. Explore space why? There is nothing but space out there??? Who needs the IRS (everyone will pay whatever they owe, Americans are honest) nor the United States Mint-we got bitcoin now! Mine safety we don’t need, there hasn’t been a mining death in years. Pollution, that’s just a left-wing myth. (This of course is all tongue and cheek you know!!!)??
?Now that we have gotten rid of that fraud and waste, (and fired nearly 1.5 million workers) we still need to cut another $1 trillion more per year out of our budget and we can then balance it. That is right, we only need to cut $1 TRILLION more to balance the budget. Next time you hear someone say we just need to cut spending, ask them specifically where they are going to be cutting and by how much and does it even come close to balancing the federal budget!?
?Some additional information to consider… A quote from the Bible says “Whoever walks with the wise becomes wise. But the companion of fools will suffer harm.” Proverbs 13:20. I often read that we are over-taxed in this country. I do realize no one likes to pay taxes, but do some comparisons, to see how we match up to our major competitors around the world.?
?Below is a list of nations that are members of the OECD (total membership has 38 nation-states), that pay the lowest taxes as measured by the percentage of the GDP.?
? Nation Taxes to GDP percentage (2021)?
OECD Average 34.1%?
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32. United States 26.6?
33. Costa Rica 24.2?
34. Turkey 22.8?
35. Chile 22.2?
36. Ireland 21.1?
37. Columbia 19.5?
38. Mexico 16.7?
?As anyone can see we are not highly taxed when compared to other developed nations. If we look at the nations that are walking with us in a low-tax environment, we might begin to question “Should we be with this group of nations?” None of the nations listed below us are nations we would consider to be world-class competitors. If the United States would collect the same amount as the average member state of the OECD, we would have a balanced budget today!?
?We need to make tough choices, either raise taxes (some people will suffer), cut spending (other people suffer), or both (even more people will suffer). This will be a decade long process, if we are going to be successful in reducing our budget deficit. I for one do not advocate for a large-size government or a small-size government; but I do ask that we pay for the amount of government we receive and quit harming the next generation because of our greed and lack of understanding.??
?Christian M. Staples MBA?
Former member of the American Economic Association?
756 Worden Avenue?
Kalamazoo, MI 49048?5043??