The economics of the debt ceiling debate

Dollar bills with capitol building.

Once again Congressional debt ceiling debates have markets, the media, and the public concerned about the ability of the U.S. to pay its bills on time. Economists at Brookings have explored various aspects of this debate—the origins, the impact, and the consequences. Explore recent explainers, analysis, and testimony below.

What is the debt limit and why does it exist?

What is the federal debt ceiling?
Sage Belz, Sophia Campbell, Lorae Stojanovic, and David Wessel

The origins of the debt limit date back to World War I, when Congress ended the practice of approving every Treasury bond issue individually and allowed the sale of Liberty Bonds up to a specified amount to help finance the war. As The Hutchins Center on Fiscal and Monetary Policy explains, basically the same process occurs today: When the federal government runs a deficit, it borrows money to cover the difference, usually by selling Treasury securities. However, in recent decades, efforts to raise the amount the U.S. can borrow by selling securities have become major political sticking points, with opponents of raising the limit arguing that they seek to rein in government spending.

Debt ceiling graph, Jan 2016-May 2023

In this post, the Hutchins Center answers common questions on the debt limit, including how the government functions when the debt limit is reached and what happens if Congress refuses to raise the debt ceiling.


What’s the difference between a government shutdown and a failure to raise the debt ceiling?
David Wessel

As of January 19, 2023, the U.S. had borrowed as much money as it is legally allowed to borrow—$31.4 trillion. Since then, the Treasury has taken so-called “extraordinary measures” to keep paying the nation’s bills, but its ability to do so will end in the coming days according to Treasury Secretary Janet Yellen. In a recent post, David Wessel of the Hutchins Center examined how this differs from a “government shutdown,” which occurs when the federal government fails to pass a budget. Under an all-too-familiar shutdown, roughly 75% of government functions continue, as their funding is not governed by annual appropriations, Wessel explains. This shutdown of operations has happened four times for more than one day. Failure to raise the debt limit, on the other hand, would threaten all government spending, and it has not happened in the modern era.

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7 things to know about the debt limit
Leonard Burman and William G. Gale

“Raising the debt limit is not about new spending; it is about paying for previous choices policymakers legislated.”

The debt ceiling is often misunderstood, write William Gale and Len Burman of the Tax Policy Center, and “[p]olicymakers often fuel this misunderstanding with misleading statements that distort the debate.” In a brief from January, Gale and Burman laid out seven facts about the debt limit, including that the limit has been raised 78 times since 1960, only one other advanced country (Denmark) has a debt limit rule like ours, and not raising the debt limit would require $1.5 trillion in spending cuts this year.

Ultimately, Gale and Burman argue for reinstating the Gephardt Rule, a rule that has been in place at various times to automatically authorize borrowing to fund legislatively approved programs.


What happens if Congress does (or doesn’t) raise the debt ceiling?

How worried should we be if the debt ceiling isn’t lifted?
Wendy Edelberg and Louise Sheiner

The U.S. has always managed to raise the debt ceiling in time to prevent spending cuts, but this time could be different. “The economic effects of such an unprecedented event would surely be negative,” wrote Edelberg and Sheiner last month. “However, there is an enormous amount of uncertainty surrounding the damage the U.S. economy will incur if the U.S. government is unable to pay all its bills.” Their analysis explores several scenarios: What payments would Treasury prioritize in the event of a default? How would the stock market respond? Are any of the proposed alternatives to Congressional action viable?

“The workarounds that have been proposed—the platinum coin, increasing borrowing despite the debt limit, prioritizing payments—either bring significant legal uncertainty or are not sustainable solutions. These unlikely workarounds do not avoid the chaos that is inherent to the debt ceiling binding. The only effective solution is for Congress to increase the debt ceiling without delay or, better yet, abolish it.


Debt ceiling brinksmanship has clear negative effects on taxpayers
Wendy Edelberg and Noadia Steinmetz-Silber 

An unfortunate reality of the current debt ceiling clash is that at least some damage is likely already done, according to a new report by Wendy Edelberg and Noadia Steinmetz-Silber of The Hamilton Project. Their analysis finds that, between mid-April and May 22, interest rates on Treasury bills maturing on June 1 rose from 4.4% to 5.7%. The premium investors demand to hold short-term Treasuries is significantly larger and rose significantly earlier than during debt limit negotiations of 2011 and 2013. In effect, investors are demanding higher returns to shoulder the risk of not being paid on time, and they clearly see that risk as higher this time around. “The relatively large premium being charged now on Treasury securities maturing in June suggests that financial markets are concerned that principal payments will indeed be delayed and more so than in prior debt limit standoffs,” write Edelberg and Steinmetz-Silber. The increase in interest rates will cost taxpayers, and even if a deal is reached, the entire situation may repeat when the next round of debt ceiling debates comes around.

Figure 1: April and May 2023 Yield Curves

What have Brookings experts said to policymakers?

Wendy Edelberg testifies on how a US default crisis harms American families and businesses
Wendy Edelberg

Building on her analyses with Louise Sheiner and Noadia Steinmetz-Silber, Wendy Edelberg spoke to the Congressional Joint Economic Committee recently to discuss the impact of a debt limit bind on American families and businesses. In addition to the higher costs of interest payments that taxpayers would have to pay, as noted above, if Treasury wanted to continue making interest payments without being able to borrow more money it would have to cut non-interest spending by 35% or more.


Why Congress needs to abolish the debt limit: Testimony before the House Budget Committee
Louise Sheiner

In testimony given early in 2022, Louise Sheiner made three arguments for why the debt ceiling should be abolished. Firstly, she argued, the debt ceiling has not achieved the stated goal of its proponents: imposing fiscal discipline on Congress. Secondly, as she and Wendy Edelberg explored more fully, the impacts of a default are uncertain but would certainly be negative. And finally, we as a country face any number of real, tangible economic challenges, Sheiner said, and the debt ceiling gets in the way of facing those challenges. “Bickering over the debt ceiling is a waste of time and energy, creates unnecessary uncertainty, threatens the benefits of issuing the world’s safest asset, and undermines public confidence in our political institutions.”


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