Tax Analysts Blog

Debt Limit Debates Are Good for Theater, Not for Policy Reform

Posted on Feb 5, 2014

The federal debt limit is an embarrassment, both in practice and by design. Critics insist that the limit is meaningless -- that debt is a function of numerous tax and spending decisions, not some single, arbitrary cap. And those critics have a point.

But the debt limit still plays a powerful symbolic role in American politics. Over the course of the last century, it has been a convenient tool of fiscal shaming.

Originally, the debt limit was intended to loosen congressional control over borrowing, not tighten it. Before World War I, Congress approved every issuance of federal debt individually; when lawmakers wanted to build a canal in Panama, for instance, they had to approve the bonds to pay for it, too. As the Congressional Research Service has pointed out, this granular control over federal borrowing extended to the particulars of bond issuance, including interest rates and maturities. It gave Congress lots of control and kept the Treasury Department on a short leash. But it also created problems: as the economy (and the federal government) continued to expand, this piecemeal approach grew unwieldy.

Under the pressures of World War I, lawmakers agreed to loosen their grip on the government's borrowing function. The Second Liberty Bond Act of 1917 gave the treasury freedom to issue debt on its own accord, subject only to a specified cap. This loosening of the purse strings was not unprecedented -- the Spanish-American War had prompted similar, if more limited, reforms. But 1917 still marked a turning point -- never again would Congress exercise such close control of the nation's borrowing.

Of course, the debt limit still gave Congress a role in managing federal debt. As debt increased over time, Congress had to periodically raise the cap. And increasingly, these votes served as a vehicle for some fiscal scolding.

Perhaps the most famous example of fiscal shaming came in 1953, when Senate Finance Committee Chair Harry Byrd, a conservative Virginia Democrat, chastised President Eisenhower for his spendthrift ways (and made him wait a good long time for his requested increase in the debt ceiling).

Later presidents faced similar tongue-lashings from self-righteous lawmakers. Then, as now, those members of Congress had precious little moral authority when it came to fiscal responsibility. They were, after all, usually the same lawmakers who had approved the tax and spending legislation that made new debt unavoidable. But that fiscal reality didn't prevent Congress from using debt limit votes to score a few points at the president's expense.

Presidents, for their part, made their peace with these theatrics. Even when lawmakers dragged their feet in raising the debt limit (as they did in the 1950s and again in the late 1960s), everyone understood that requested increases were a certainty.

This reality was implied in the "demands" that lawmakers usually attached to requested hikes. Invariably, the price of an increase was almost always reasonable. Lawmakers knew better than to make extravagant demands, because they understood that threats to refuse an increase were ultimately hollow. Even in grand showdowns, like the one that Lyndon Johnson faced in 1967, lawmakers demanded little more than cosmetic changes to administration fiscal policy.

On the rare occasions when debt limit hikes came packaged with major policy changes, those reforms enjoyed broad political support, including at least some from the White House. The approval of the Gramm-Rudman-Hollings deficit reduction measure in 1985 is a case in point.

As long as everyone understood the rules of the game, debt limit debates were manageable and even useful. Members of Congress got a chance to sound-off, and presidents continued to enjoy a more or less free hand in managing federal debt.

All this changed, however, when Congress began using debt limit debates to make major demands on the White House. This development is new, dating only to the summer of 2011. That's when Tea Party Republicans began talking seriously about refusing a debt limit increase, even at the cost of national default. In the face of such threats, President Obama blinked and agreed to major fiscal reforms.

And that's when the scales of fiscal shame began to tip.

Regretting his 2011 mistake, Obama drew a line in the sand last fall, demanding a debt limit hike unencumbered by serious policy concessions. It was an easy decision, no doubt, since Republicans were demanding that Obama abandon his single most important policy achievement: health care reform.

Obama won that fight -- and in the process, forced Republicans to remember what they should never have forgotten: that debt limit debates work only as theater, not as major policy vehicles.

But apparently, memories are short on Capitol Hill. According to news reports, the GOP is again pondering a variety of demands for a new debt limit hike. Some of these demands are more or less reasonable, falling within the historical parameters of past debt limit showdowns. But others are more like the demands of 2013: delusional in their scope and ambition.

Eventually, cooler heads in the Republican party will no doubt prevail. But not, perhaps, before Republicans find themselves embarrassed -- again -- by the their tendency to overreach.

Read Comments (3)

vivian darkbloomFeb 4, 2014

" In the face of such threats, President Obama blinked and agreed to major
fiscal reforms."

"Regretting his 2011 mistake, Obama drew a line in the sand last fall...Obama
won that fight -- and in the process, forced Republicans to remember what they
should never have forgotten: that debt limit debates work only as theater, not
as major policy vehicles. "

One would think that the thesis here would be supported by consistent argument,
but I fail to see any consistency here.

First, regarding the 2011 standoff, "Obama blinked and agreed to major fiscal
reforms" Umm, so this debate was just "theater"?

"Regretting his 2011 mistake..."

Major fiscal reform was a "mistake"?

"Obama won that (2013) fight -- and in the process, forced Republicans to
remember what they should never have forgotten: that debt limit debates work
only as theater, not as major policy vehicles.

But apparently, memories are short on Capitol Hill."

Because they only extend back to 2013 and not 2011?

AMT buffFeb 4, 2014

As I posted on the Tax Reform article, a crisis, real or manufactured, is
necessary to force the parties to compromise on any major issue. No crisis, no
action. Therefore I believe that a manufactured crisis like the debt limit can
be better than no crisis at all.

edmund dantesFeb 5, 2014

I for one would love to see Congress return to the practice of approving every
bond issue, the practice before 1917. Maybe then they'd be too busy to do
things like wreck our health care system.

Nice summary of the law. I believe that the Republican requirements will be
something modest, such as extending to individuals the same one-year ACA
reprieve already granted to big companies.

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