Written By: Jay Mistry

31.46 trillion dollars. You may be wondering what this figure is, one thing is for certain that this is a significant amount of money. This figure is the amount of money that the United States of America owes to its creditors. In recent history, the USA has been the biggest economy in the world, with a GDP of 23.32 trillion dollars (1). Along with being the biggest economy in the world, it also carries the most debt. In 1917, the United States came up with a measure to control the amount of debt the nation can surmount called the debt ceiling (2). In theory, this should keep a nation’s finance in line, but this can have some significant consequences on both the USA and the global economy.

The Debt Ceiling and it’s History

As stated previously, the debt ceiling has been around since 1917. It was created in response to the end of World War 1 with the aim of controlling government spending. The ceiling is meant to put a limit on the amount of money the government can borrow, through the act of issuing bonds (2). The way that the debt ceiling works can be summed up by these three functions. It can be raised, suspended, or the country can default on its debt. Raising the debt ceiling is as simple as it sounds, it would mean raising the amount of debt the country can take on. Suspending it would mean ignoring the debt ceiling temporarily, allowing the treasury department to go over the debt ceiling rather than raising it by a specific amount. This used to be a rare occurrence, but this has occurred seven times since 2013 (3). The last outcome, and perhaps the most disastrous, is defaulting on their payments, meaning that the government is unable to pay on their commitments.

Some of the advantages to having this measure is that it’s a way of self-governance for nation. The debt ceiling is a way to visualize a limit on a government’s spending, which can help better manage its finances. This can also help prevent the likelihood of default on its payments. However, there are also some drastic drawbacks to this financial measure. It also promotes fiscal irresponsibility, as the debt ceiling can be easily raised. This would allow the nation to continue to take on debt. This would also lower the credit rating of the nation as whole (2). To better visualize, think of yourself as a mortgage agent. Imagine a file comes across your desk of a client that wants to take out a mortgage, but as you dig deeper you see that they do not pay off their debts. Instead, they put off their debt and continue to take on expenses, knowing they haven’t paid off their debts. As a mortgage agent, would you give this individual what they are asking for?

Changes in the Debt Ceiling

Graph 1 – Debt Ceiling Hikes from 1940 to 2021 (4)(5)

Since 1917, the debt ceiling has increased a significant amount. Tracking this information from 1940, we can see that there is an exponential trend to the increases in the debt ceiling. Up until 1996, we can see that there is a steady increase with minor fluctuations, where some years we can see that the debt ceiling decreases, which signifies an era of economic profit. To better visualize this change, we can find the difference between the years to visualize how much the change has occurred between each year.

As shown above, we can see clearly where the biggest spikes have occurred. Each spike represents an economic crisis, as whenever there is a crisis government spending increases to reset the economy. For example, there was a major spike in government spending in 2008, due to the global recession that was caused by the housing bubble collapse. Whereas more recently, during 2020 when the pandemic was in full effect there was a huge resurgence of government spending. To start, a total of 4.2 trillion dollars was spent within the past 2 years (6). This had caused the debt ceiling to once again be raised on December 15^th, 2021 (2).

What’s Happening Right Now?

If you’ve made it this far that would mean you understand what the debt ceiling is, some of its history, and that I haven’t bored you to death. On January 19^th, 2023, the United States of America had hit the limit on the amount of debt that the country can take on, which is $31.4 trillion. Due to this, the Treasury took in what they deemed “extraordinary measures” to ensure that the debt limit would bind (7). Some of these so-called measures were to declare a “debt issuance suspension period” for three retirement funds, these being the Civil Service Fund, the Disability Fund, and the Postal Service fund. The agencies had suspended any new investments for that period and could only redeem funds scheduled before that date (8). Next, the Government Securities Investment Fund, which is a fund for all federal employees, has been suspended for reinvestment until further notice. The daily reinvestment of the Exchange Stabilization Fund was put on hold as well. This fund was used to stabilize the foreign exchange rates by trading (buying and selling) foreign currencies. These cuts were made to stabilize and potentially lower government spending, so that the government can pay back more than they spend but unfortunately this is not the case. As of May 2023, the government has come close to defaulting on their payments, which as we know can have major negative economic effects and could trigger a deep global recession.

After months of deliberation, the Senate came to the decision to suspend the government’s spending limit until the year 2025, meaning that this issue will be ignored until after the next election. Some things that came because of this decision are that the Biden administration have pushed for significant cuts in government spendings and changes. One example of this would be the Supplemental Nutrition Assistance Program, which millions of families use to assist with raising grocery prices. This is just one of the many programs that got cut due to the spending limit.

Conclusion

Being the biggest economy in the world comes with a set of downsides such as having the most debt by a nation in the world. Government spending can make or break a nation, in the case of the United States, their spending can not only break their nation, but it can also break the global economy if the right measures are not taken.

Works Cited

1. The World Bank. [Online] 2021. [Cited: 05 22, 2022.] https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=US.
2. Smith, Tim. Investopedia. U.S. Debt Ceiling: Definition, History, Pros, Cons, Clashes. [Online] Jan 17, 2023. [Cited: May 22, 2023.] https://www.investopedia.com/terms/d/debt-ceiling.asp.
3. Breman, Noah. Counsil on Foreign Relations. What Happens When the U.S. Hits Its Debt Ceiling? [Online] May 2023, 2023. [Cited: May 22, 2023.] https://www.cfr.org/backgrounder/what-happens-when-us-hits-its-debt-ceiling#:~:text=Congress%20can%20also%20choose%20to,limit%20seven%20times%20since%202013..
4. The Guardian. [Online] July 2011. [Cited: May 22, 2023.] https://www.theguardian.com/news/datablog/2011/jul/15/us-debt-ceiling-historic#data.
5. BGR Group. History of Debt Limit and Why It Matters. [Online] 2022. [Cited: May 22, 2023.] https://bgrdc.com/history-of-debt-limit-and-why-it-matters/.
6. COVID-19 Spending. USA Spending. [Online] March 3, 2023. https://www.usaspending.gov/disaster/covid-19?publicLaw=all.
7. Wendy Edelberg, Louise Sheiner. Brookings. How worried should we be if the debt ceiling isn’t lifted? [Online] April 24, 2023. https://www.brookings.edu/2023/04/24/how-worried-should-we-be-if-the-debt-ceiling-isnt-lifted/.
8. Peter G. Peterson Foundation. Peter G. Peterson Foundation. WHAT ARE THE TREASURY’S “EXTRAORDINARY MEASURES”? [Online] January 19, 2023.