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The Oddity And Importance Of The U.S. Debt Ceiling

The U.S. Capitol in Washington, D.C., on October 16, when a deal was reached to end the immediate debt threat and shutdown.
The U.S. Capitol in Washington, D.C., on October 16, when a deal was reached to end the immediate debt threat and shutdown.
WASHINGTON -- When the world's top economy stands on the razor's edge of financial default, one can't help but question what led to the crisis.

Why does the United States have a debt ceiling in the first place? Where did this limit on borrowing come from? And why keep it if it has become so problematic?

In a global context, Washington's debt limit is certainly unusual. Among the world's industrialized countries, only one other nation -- Denmark -- has a system in which the legislature must approve borrowing separately from spending. In most other countries, the relevant authorities are given broad allowance to borrow as much as they need to carry out the spending that the legislature has approved.

In the United Kingdom, for example, the Treasury is authorized to borrow as much as required to realize approved spending measures. In Canada, the executive branch can borrow what it must to fulfill the yearly budget.

Several EU countries, such as Poland, have implemented measures to keep the public debt manageable, setting limits on borrowing. But those limits are pegged to the size of the economy.

Jacob Kirkegaard, a senior fellow at the Peterson Institute for International Economics in Washington, says that despite having a debt ceiling, things work quite differently in his homeland.

"In Denmark, the debt ceiling is always -- not by law, but sort of by political consensus -- set at multiple times the national debt. That's another way of saying that Denmark never faces any risk of actually breaching it," Kirkegaard says. "The debt ceiling there is solely something that was implemented for constitutional or almost administrative reasons. It is never something that is used in day-to-day politics, like we see it in the United States right now."

The U.S. debt ceiling wasn't always the tool of partisan politics that it has become in recent debt crises. In fact, it was originally intended to make things easier, not harder, in Washington.

Before 1917, the U.S. Congress approved of specific loans as needed. One was granted to construct the Panama Canal. But in an effort to give the Treasury increased flexibility during World War I, lawmakers scrapped that approach and moved toward creating an aggregate limit on borrowing.

While a few reductions have been made to the debt limit since then, the ceiling has generally continued to rise. According to the U.S. Treasury Department, Congress has acted 78 separate times since 1960 to permanently raise, temporarily extend, or revise the definition of the debt limit.

The limit currently stands at around 75 percent of U.S. gross domestic product (GDP).

"It's only in recent times, as U.S. debt has been allowed to approach the ceiling, that it has been used for rather blatant political leverage purposes," says Kirkegaard.

In the past few years, opposition Republicans have made support for raising the debt limit contingent upon spending cuts and other policy changes.

This year's standoff, which pushed Washington closer to the brink than ever before, generated consternation among many Americans. Markets and nations around the world -- including China, Washington's top creditor -- also might have wished that the debt ceiling were scrapped. But don't expect that any time soon, Kirkegaard says.

"Unfortunately, the likelihood of the debt ceiling being abolished is very, very small," Kirkegaards says. "Political parties very rarely sign away their own political leverage."

That reality, however, hasn't stopped economists, administration officials, and Democratic lawmakers from calling for end to the debt ceiling recently.

U.S. Federal Reserve Chairman Ben Bernanke advocated eliminating the ceiling earlier this year. Shortly before finishing his term as Treasury Secretary this January, Timothy Geithner said, "It would have been time a long time ago to eliminate [the debt ceiling]."

Democrats in the House of Representatives introduced a rule in the late 1970s that automatically increased the debt limit by the necessary amount once a budget was agreed upon. However, it was scrapped in the mid-1990s after Republicans regained control of the House.

More recent attempts haven't made it nearly that far. An initiative earlier this year by Democratic representatives in Congress to do away with the "legislative relic" went nowhere.

The Obama administration has also been reluctant to test legal and constitutional waters to get around the debt ceiling.

Meanwhile, many Republicans insist that the ceiling should stay not as a vehicle for scoring political points but because it generates debate on the country's soaring debt and could even offer solutions.

In September, Republican Congresswoman Cathy McMorris Rodgers (Washington) called the debt limit debate "a golden opportunity to fix the problems coming out of Washington."