“The debt ceiling is an important tool for addressing debt and deficit,” suggests Rep. Adrian Smith (R‑NE).

“Failing to raise the limit would lead to a catastrophic default that would rattle global financial markets and could risk throwing the U.S. into a recession, economists say” report the Washington Post’s Jeff Stein and Marianna Sotomayor.

Which is it? Is the debt limit a critical fiscal tool to rein in debt? Or is it an irresponsible bargaining chip that threatens to cause economic havoc?

It’s both. This is where a two‐handed economist comes in handy.

On the one hand, reaching the debt limit provides an important wake‐up call to legislators to reform spending practices. Reforms should prevent the government from taking on even more debt in the future. As Figure 1 below illustrates, the debt subject to the limit is growing at an accelerating pace. Leveraging the debt limit to reform spending practices is particularly relevant because two‐thirds of the federal budget grows on autopilot. Instead of lawmakers authorizing spending annually, spending grows based on statutes that, in some cases, were adopted decades ago.

Think Medicare and Social Security. Spending on these programs is growing as the U.S. population is aging and living longer. This means there are more benefit recipients, compared to the workers paying for those benefits. And entitled beneficiaries are receiving greater benefits over their extended lifetimes. The debt limit provides a potential trigger to reform programs that are growing on autopilot before lawmakers are forced to make changes during a potential fiscal crisis. Or when the trust funds governing Medicare and Social Security become depleted and more gradual policy reform options are off‐the‐table.

On the other hand, the debt limit does not enable new spending. It merely authorizes Treasury to issue more bonds to finance existing spending obligations. Basically, it allows Treasury to make payments when tax revenues fall short by creating new debt. Which is pretty much all the time given the government does not operate on a budget, let alone one that’s intended to balance.

What purpose does the debt limit serve? A very important one. The debt limit provides legislators with political coverage and leverage to revisit current policies based on how they impact the growth in the U.S. federal debt. Approaching the debt limit confronts Congress and the Administration with the results of unsustainable budget decisions: growing amounts of debt. Rising debt is a symptom of deficit‐spending. Deficits happen when Congress authorizes more spending than it collects in taxes.

Legislators rarely act to change laws unless they are heavily motivated to do so. They can be motivated by constituent demands. They can feel forced to act during a fiscal or economic crisis. And they’ll usually act when pushing up against a painful deadline such as the debt limit. Congress wants to avoid defaulting on legal obligations and experiencing the economic and political ramifications that could bring.

The debt limit is also a highly public affair. Constituents care about deficits and debt. Pairing an increase in the debt limit with measures to reduce future deficits and debt is the responsible choice. And the pressure brought on by the debt limit works to bring about changes to reduce future debt at least some of the time.

Brian Riedl examined 14 major deficit‐reduction negotiations since 1980 and identified that: “The debt limit had been tied to every major deficit deal between 1985 and 2011.” In some cases, the debt limit prompted a deficit reduction deal. In others, Congress tacked a debt limit increase onto a deficit reduction deal that was already in the works.

The last major deficit reduction deal negotiated over a debt limit standoff was in 2011. It’s worth reviewing that deal now that legislators will confront the debt limit again in 2023 under divided government (just like they did in 2011). Then Republican House Speaker John Boehner and then Democratic President Barack Obama agreed to the Budget Control Act within mere days of the debt limit threatening to bind the Treasury from making further debt‐financed payments.

The Budget Control Act of 2011 increased the debt limit. It also required Congress to vote on a constitutional balanced budget amendment, which failed to pass. And it imposed spending caps (annual maximum spending thresholds) for defense and non‐defense discretionary appropriations—the one‐third of the budget Congress votes on each year at the end of September.

The Budget Control Act also set up a bipartisan fiscal commission—the Joint Select Committee on Deficit Reduction, or the so‐called Super Committee—and tasked it with identifying additional savings. Should it fail, there would be automatic spending cuts (called sequestration in budget‐speak). And fail it did. Some sequestration took place. But Congress also renegotiated the Budget Control Act several times to avoid additional spending cuts.

By 2013, the Budget Control Act’s debt limit increase had been exhausted and Congress began to suspend the debt limit. Suspensions represented a major change in policy. Debt limit suspensions are like waivers. A suspension renders the debt limit inactive until a certain date, when a new debt limit is automatically reinstated. Unlike a numeric debt limit (i.e. the $2.5 trillion increase adopted in December of 2021) which limits the level of debt that Treasury is authorized to borrow in credit markets, a debt limit suspension eliminates the debt limit for a set period of time.

Some legislators liked suspensions for the predictability of being able to schedule debt limit negotiations around a certain date, rather than having to guess when Treasury’s bond issuing authority might become exhausted. Others appreciated that debt limit suspensions where like temporary eliminations, putting the debt limit on a track for full repeal.

Until 2021. That year, Congress adopted a numeric debt limit once again. Republicans were motivated to put limits around further deficit increases by the Biden administration. As Senator Pat Toomey (R‑PA) stated in a press release, decrying the debt limit increase:

“As one small consolation…Democrats must now specify the amount of borrowing authority necessary to cover their reckless tax and spending spree.”

Lawmakers first raised the debt limit by $480 billion to a total of $28.9 trillion in October to buy more time for negotiations. This was followed by a $2.5 trillion increase in the debt limit in December, estimated to kick the can into the 118th Congress (see figure 2 below). Their plan to delay the next debt limit showdown until 2023 worked.

The 118th Congress will be confronted with the debt limit sometime in 2023. The Bipartisan Policy Center estimates that the current debt limit at $31.38 trillion will be reached sometime late summer or early fall. After a 40‐year inflation high and $5 trillion in new deficits added by the Biden administration and with a potential recession on the horizon, approaching the debt limit in 2023 will present Congress with a key lever to stabilize U.S. debt and unleash economic growth with spending reforms. I’ll write about what shape such reforms should take in an upcoming post.