Why the Debt Ceiling Doesn't Matter

Once again, Washington is grappling with its debt problem.  In actuality, while they make a great deal about the debt ceiling, in the hallowed halls of Congress, the ruling class knows that the fiscal situation in the United States is unsustainable.  Let's look at three measures which prove their fiscal incompetence.

 

1.) Interest owing on the current federal debt:

 

In the first quarter of 2023, the annualized interest owing on the federal debt hit another new record of $928.929 billion, up 80 percent from $516.098 in the third quarter of 2020 just after the mini-recession of the pandemic wound down.  Obviously, given the increase in interest rates on the federal debt since the Federal Reserve has done its best to kill the inflation that it launched during its money-printing response to the pandemic as shown here:

 

...this fiscal situation is unsustainable and it is just a matter of time before the annual interest payments on the debt passes the $1 trillion mark, money which does not add to economic growth.

  

As an aside, given that the United States is by far the biggest spender on defense when compared to other nations, it is interesting to see that spending on defense, the biggest single line item on Washington's annual budget, is now roughly the same as spending on debt interest payments:

 

 

2.) Federal spending:

 

The red line shows the general trend of the growth of federal spending over the period from 1970 to 2020.  The massive growth in federal spending as Washington responded to the COVID-19 pandemic during 2020 is very obvious.  Again, this fiscal situation is unsustainable.

  

3.) Growth in the debt ceiling:

 

 

Thanks to Statista, we can see that it doesn't matter which party is in power, the debt ceiling rapidly rises as Washington habitually spends more than it brings in as revenue.  Once again, this fiscal situation is unsustainable as we can see on this graph which shows the federal surplus/deficit situation going back to 1980: 

 

 

The United States federal debt ceiling has become a laughable concept.  Washington's ruling class loves to spend more than it brings in as revenue, a reality that will eventually become painful as Congress kicks the "debt can" further and further down the road.

The debt ceiling doesn't matter for one reason; it just becomes the new debt floor.

A History of Washington's Debt Ceiling

With the recent budget impasse in Washington, it seemed like a prudent exercise to look at the fiscal regime in the American capital given the partial shutdown and federal budget issues that seem to appear on a fairly regular basis.   As I have done in the past, let's look at how often Washington has suspended and raised the debt limit as well as invoking the use of "extraordinary measures" to ensure that the services provided by the federal government to taxpayers remain intact.

The modern debt limit was created in 1939 as the Public Debt Act of 1939 and was replaced with the Public Debt Act of 1941 (aka H.R. 2959 - 77th Congress) that set the stage for the financing of modern government debt financing.  Here is the title page for the Act:

Until the 1941 act was passed, the federal government treated all interest and capital gains on its debt obligations as tax exempt.  The 1941 act changed this by making the difference between the purchase and redemption price for savings bonds taxable.   At the time that the Public Debt Act of 1941 was passed, the aggregate limit on all federal debt obligations was placed at $65 billion. Keeping in mind that the United States was about to enter the Second World War, this limit was raised as follows:

1942 - $126 billion

1943 - $210 billion

1944 - $260 billion

1945 - $300 billion

In 1946, the Public Debt Act was once again amended, lowering the debt limit to $275 billion. 

Here is a lengthy table showing the entire history of changes to the debt limit:

Since the concept of a debt ceiling was launched in 1941, Congress has either changed, amended or suspended the statutory debt limit 121 times (up to and including 2017).  

Here is a line graph showing the evolution of the debt ceiling since 1941 and how it is projected to grow out to 2023:

It is also important to note how the debt ceiling growth rate accelerated substantially just after the beginning of the new millennium as the War on Terror began and during the Great Recession when Washington spent trillions of taxpayers' dollars bailing out Wall Street and the banking sector as a whole.

Here is a detailed look at the period between 2010 and the beginning of 2018 showing how often Congress has had to rewrite its own debt laws:

At some point, Congress may find it difficult to kick the debt can further down the road, particularly in a scenario where Washington will find itself bailing out the economy as it did during the Great Recession.  If we want a sense of what could lie ahead should Washington continue its overspending ways, here is a screen capture from the United States Department of Commerce showing the federal government services that will remain active during the most recent lapse of Congressional appropriations:

Here is a list of the services that will not be available during the funding lapse:

Obviously, the longer that the federal government is underfunded, the more services that will have to be  reduced since the government cannot run on ether.

The current level of political polarization in Washington has very effectively accomplished one thing; it has made American voters forget all about the fiscal mismanagement that has taken place, an issue that will eventually cost American taxpayers hundreds of billions of dollars in annual interest payments on the debt that Washington has accumulated over the past two decades in particular. 

Washington and its Chronic Overspending Problem

With Congress perpetually dealing with an extension to the debt ceiling, I realized that I had not updated my posting on the debt accrued by Washington over the past 11 administrations, going back to the Kennedy Administration in January 1961.  In this posting, I will provide my readers with data showing the nominal increase in the debt for each administration, the percentage increase in the debt and the compounded annual growth rate or CAGR of the debt during the period of time that each of the last eleven presidents has occupied the Oval Office.

I have sourced my data from the Treasury Department's Debt to the Penny website which you can find here.  The Debt to the Penny website provides us with a daily debt update, allowing interested persons the ability to search the debt on a certain day, in my case, I have used the inauguration date as the starting date for each president and the day prior to the inauguration day as the end of the presidential term in office.  In the case of the Kennedy, Johnson, Nixon and Ford Administrations where their terms in office started or ended in mid-month, I have used the debt data for the end of the last month that they were in office as an ending point and starting point for their successor.  As well, you should note that my debt data includes both external marketable debt and intragovernmental debt, that is, the debt that the federal government owes to itself for borrowing from one trust fund to cover government expenses.  Here is the most recent breakdown of the two types of debt:

As well, I should explain the concept of compounded annual growth rate or CAGR.  By using the compounded annual growth rate rather than just using an average growth rate, we remove the impact of a drop in the value of a dollar over the 57 years from the beginning of the Kennedy Administration to the current Trump Administration.  For example, according to the Bureau of Labor Statistics CPI Inflation Calculator that you can find here, one dollar in January 1961 has the same purchasing power as $8.27 in December 2017.  This means that when the Kennedy Administration added $1 to the federal debt, it was roughly equivalent to the Obama Administration adding $8.27.  As such, here is the formula that I have used to calculate the compounded annual growth rate of the federal debt:

With that background, let's look at the statistics starting with a table showing the raw debt data for each of the last eleven administrations:

Here is a bar graph showing the nominal increase in the federal debt for each administration (in billions of dollars):

As you can see, the Obama Administration is, by a very wide margin, responsible for the greatest growth in the nominal federal debt. 

Here is a graph showing how, over the last two administrations, the federal debt began to grow nearly exponentially:

Here is a bar graph showing the percentage increase in the federal debt for each administration:

While the Obama Administration was responsible for the greatest nominal growth in the federal debt, the Reagan Administration was responsible for the highest growth rate in the nominal debt.

Lastly, here is a bar graph showing the compounded annual growth rate in the federal debt for each of the last eleven administration:

Once again, the Reagan Administration was responsible for the highest compounded annual growth rate of the federal debt following by the Ford, Bush I and Carter Administrations.  When measured using the compounded annual growth rate, the Obama Administration comes in fifth place, well behind the Ford, Reagan and Bush I Administrations.

Since 1917, the Second Liberty Bond Act placed an aggregate limit on federal debt as well as limits on specific debt issues with a general limit placed in 1939.  Let's close this posting with a look at how many times Washington has extended the debt ceiling between 1993 and 2014:

In addition, since 2014, Congress has increased or suspended the debt limit as follows:

March 2015 - $18.1 trillion

November 2015 - suspended statutory debt limit to March 15, 2017

March 2017 - $19.8 trillion

September 2017 - suspended statutory debt limit to December 8, 2017

It is interesting to see how Congress can suspend laws when it suits their own best interests, isn't it?

As you know only too well, the new debt ceiling is just the next debt floor since Washington has no incentive to control its spending or pay back any of the $20 trillion in accrued debt, instead it is always easiest just to kick the "debt can" further down the road.  The greatest danger is that, as interest rates begin to grind upwards, servicing the debt will become increasingly difficult since Washington is currently living in a debt interest "Wonderland".  At some point in time, American taxpayers will find that they are paying more taxes to cover the interest owing on the debt than they are paying to cover the cost of their entitlement programs.

The Laughable Concept of Washington's Statutory Debt Ceiling

Once again, Washington finds itself dealing with the debt ceiling, an issue that seems to tie up an increasingly polarized Congress that seems to put its own best interests ahead of Main Street America.  In this posting, I want to take a look at the concept of the statutory debt limit/debt ceiling and how Congress has dealt with this issue in the past.

In recent years, as the federal government has added significantly to the debt through deficit spending, Congress has had to deal with the statutory debt limit on a relatively regular basis.  The statutory debt limit applies to nearly all federal debt including debt held by the public (i.e. outside of the federal government itself) and debt held on the government's own accounts (intragovernmental debt).  Approximately 0.5 percent of total federal debt is excluded from debt limit coverage.  Most of the government's own debt is held in federal trust funds like Social Security, Medicare, Transportation and Civil Service Retirement accounts.  Even though there are hundreds of federal government trust funds, the 12 largest government trust funds hold 98.8 percent of the intergovernmental debt.  

The modern debt limit was created in 1939 as the Public Debt Act of 1939 and was replaced with the Public Debt Act of 1941 (aka H.R. 2959 - 77th Congress) that set the stage for the financing of modern government debt financing.  Here is the title page for the Act:

Until the 1941 act was passed, the federal government treated all interest and capital gains on its debt obligations as tax exempt.  The 1941 act changed this by making the difference between the purchase and redemption price for savings bonds taxable.   At the time that the Public Debt Act of 1941 was passed, the aggregate limit on all federal debt obligations was placed at $65 billion.  Keeping in mind that the United States was about to enter the Second World War, this limit was raised as follows:

1942 - $126 billion

1943 - $210 billion

1944 - $260 billion

1945 - $300 billion

In 1946, the Public Debt Act was once again amended, lowering the debt limit to $275 billion. 

Here is a complete history of what has happened to the statutory limits on the federal debt from 1949 to March 2017:

Congress has either changed, amended or suspended the statutory debt limit 115 times since the Public Debt Act of 1941 was passed.

Let's focus on the period since 2010 as shown on this graphic:

As you can clearly see, Congress has repeatedly used various measures that have "kicked the debt can" further and further down the road.  As shown in grey on the graphic, since 2013, rather than coming right out and increasing the debt limit, Congress has tried to save face by temporarily suspending the debt limit five times with the latest suspension ending on March 15, 2017.  When the debt limit was reinstated, it was always reset at a new, higher level.  As I have said before, the new debt ceiling becomes the new debt floor since Washington has no hope of ever paying back any of its outstanding obligations.

Interestingly, as a "solution" to the repeated debt ceiling crises that have faced Congress over the past decade, back in September 2017, 3 Senate Democrats came up with the brilliant inspiration of pushing legislation to eliminate the debt ceiling, an idea backed by Donald Trump.  The text for the "End the Threat of Default Act" or S.1846 is as follows:

So, instead of dealing with keeping spending within the limits of revenue, the Congressional solution appears to be to get rid of the debt ceiling entirely, a move that would allow Washington the uncontrolled spending powers it desires with no fear of retribution by either Treasury holders or the American voting public.