Debt Ceiling: High Risk, Low Reward

What follows a technical default? We hope we will not need to find out.

History is littered with examples of unintended consequences: outcomes of an action that are unrelated to the intent of the decision. Smokestacks helped to keep ground-level air clean but polluted the sky and caused smog. Municipalities that mandated bicycle helmets in the interest of safety found they only deterred people from riding bicycles.

The list goes on, and the U.S. debt ceiling ranks high on it. In the nation’s first 130 years of independence, the Treasury could issue debt only by an act of Congress. During World War I, the high spending required for the war made this arrangement unworkable, as the Treasury inundated Congress with funding bills. In 1917, Congress remedied this with the Second Liberty Bond Act, authorizing the Treasury to issue debt freely up to a statutory limit, then return to Congress when a higher authorization was needed.

Since its creation, the ceiling has been raised or suspended over a hundred times, usually with no controversy. But under a divided government, the limit has been used for objectives far from its intended purpose. Far from its intention to be a remedy, the limit has unintended consequences that carry tremendous risks to institutional and market stability.

Statutory Debt Limit