Under the Second Liberty Bond Act of 1917 the United States has for the last century, made it possible to raise money and at the same time also hold the President fiscally responsible. Created under the Second Liberty Act, a debt ceiling limits the amount of money the government can borrow. This inbuilt limit is not very popular with other nations and in fact has similarities only with the Danish system. It has surely not caught up with economists’ preferences, with the majority of these arguing that it periodically creates uncertainty, an uncertainty that the country can surely do without. In the long run it could also lead to the worst financial outcomes.
Shutting down the government creates economic and political pressure, generally leads to a considerable waste of time spent on lobbying, and could severely contribute to the reduction of economic growth if it goes on for long enough – until in the end raising the debt ceiling becomes inevitable.
Before the debt ceiling was created, the country’s finances were controlled by the President, who had complete control and free reign. Over time, the infamous debt ceiling has been raised every time the Unites States came close to hitting limits. This also avoided the United States from going into default, or from losing control over the cost of its debt, it has also helped the US preserve its credit rating. For many years there has been a controversy over whether the debt ceiling is actually constitutional. According to the 14th amendment of the constitution, “the validity of the public debt of the United States, authorized by law . . shall not be questioned.”
The issuance of debt is generally accepted by the public, as long as the proceeds are used to stimulate the growth of the economy in a way that will lead to prosperity, preferably long-term. However this public support tends to be lost when raising the debt ceiling is done to fund public consumption projects such as Medicaid and Social Security. When debt is used to fund expansion, current and future generations reap rewards alike but when Debt is used for fuelling consumption it is only advantageous for the current generation and does not look towards future economic stability.
Government shutdown of 2103
The last government shutdown lasted for 16 days from October 1st 2013 to October 17 2013. In the end after endless hours of debating, all it took was a few votes to have the government funded again, and in the process avoided destroying the reputation of the world’s largest economy and the world’s reserve currency. As part of the 2015 budget deal, Congress suspended the limit. This deal is set to expire this Thursday, March 16. After which Congress needs to establish a new ceiling, which is expected to be in the region of $20 trillion to reflect the current national debt.
Treasury Secretary Steven Mnuchin sounded the alarm on the US debt ceiling, as Congress is sidetracked with passing a new health care law and approving President Trump’s cabinet nominees. Republican leaders have said they won’t push a deal to the edge and use it as a bargaining chip as they did in the previous administration. President Donald Trump is yet to weigh in on this, but has been previously critical of how Republicans allowed the debt limit to be raised.
The bottom is line is the national debt is one of the most important economic and public policy issues, especially after the last crises the world economy has seen. When good use it made of debt it can be used to foster long term prosperity and growth in the country. A proper evaluation of the national debt is extremely important, with an emphasis on the interest paid and debt levels per capita.