Note 30. The Debt Limit, COLAs, and Reversion Points
Playing with Time
The need to increase the federal debt limit has created more than a few serious political crises regularly over the decades. Since 1960, the statutory debt limit has been increased by Congress 79 separate times. The debt limit must be high enough to cover additional borrowing by the Department of the Treasury, borrowing required by the mismatch of spending and revenues. When Treasury is about to reach the limit, Congress must increase or suspend it or risk that confidence in U.S. government bonds will suffer, increase interest rates, and cause serious economic harm. As I will explain, in recent years the federal government moved from a situation in which government borrowing occurred under a debt limit to a situation in which the Treasury operates alternately by borrowing under a suspension of the debt limit and by invoking extraordinary measures.
This recurring situation always raises important questions. Why doesn’t Congress do away with the debt limit and give Treasury permanent borrowing authority as required by the mix of spending and tax policies Congress has put in place? More generally, how do Congress and the president use time in designing public policy?[1]
Some Preliminaries
The architects of public policy—legislators, presidents, policy advocates—use time as a feature of policy. In most cases, time is structured into policy on the basis of policy makers’ political and policy interests. There are times when other laws, or even constitutions, establish policy constraints or time limits that are reflected in new legislation.
The most common uses of time are these:
The policy remains in place until changed;
The policy remains in place for one year or less;
The policy remains in place for some period longer than a year;
The policy adjusts automatically, usually annually, in response to specified conditions.
Central to these choices is the “reversion point.” The reversion point is the policy that is in place if nothing is done during the current policy-making interval (say, a fiscal year or a two-year Congress). The expiration of a policy usually is associated with a “sunset” provision that provides that the policy is no longer operative once the sunset date is reached. For #1, the reversion point is the current statute. For #2 and #3, the reversion point at the end of a policy period is the policy prior to enactment (perhaps no policy). For #4, the reversion point is automatically changed.
Those actors who favor the reversion point are advantaged; the burden of avoiding the reversion outcome falls to others. In general, we might hypothesize, legislators who place a high value on continuity would favor a policy that remains in place until changed. On the other hand, legislators who want a source of leverage with executive agencies and others may want policy to expire periodically and force reauthorization of spending or programs.
Some Examples
Until changed. Many statutes remain in force indefinitely. The American with Disabilities Act of 1990, for example, was never seriously considered to be time limited. The Act requires accessibility in public accommodations, compels employers to make reasonable accommodations for employees with disabilities, and protects against discrimination to American with disabilities. Legislators placed a high value on continuity of policy and did not anticipate frequent changes in conditions that would necessitate change in the Act.
Annual. The two most salient types of annual measures are appropriations bills and defense reauthorization bills. Many members of Congress, particularly the members of the appropriations and defense committees, place high value on the requirement that presidents and executive agencies must seek new congressional approval to, in the case of appropriations, continue spending and, in the case of defense, the major defense system programs. This enhances the value of committee memberships and increases legislators influence with the executive branch.
Multi-Year. Many of the most important domestic programs—ranging from agricultural subsidies to higher education to NASA. Commonly, an authorization act for an agency or program expires in four or five years. The authorization defines the authority of an agency to act, specifies certain policies, and outlines the organization of the agency. Most of the important committees of Congress have jurisdiction over several agencies that require “periodic reauthorization,” the phrase used to describe this process.
Failure to enact a new authorization before the old one expires is common. Oddly, while House and Senate rules imply that an authorization must be in place for Congress to appropriate (that is, authorize spending) on an agency, this seldom holds up passing appropriation bills. In the House, a special rule can waive points of order. The Senate there is no general rule prohibiting unauthorized appropriations. The courts have treated appropriations passed by Congress as a self-authorizing action that allows agencies to operate.
Automatically changed. Many “entitlement” programs include annual increases in payments to beneficiaries to make cost of living adjustments, or COLAs. The Social Security COLA is the well known. It is calculated each year based on changes in the Consumer Price Index, which is measured by the Bureau of Labor Statistics. Before 1975, legislators preferred to get credit for increased Social Security payments. Senior groups, tired of struggling to get congressional action, eventually pressured Congress into enacting an automatic COLA that did not require congressional intervention. COLAs are applied to Supplemental Nutrition Assistance Program (SNAP), school lunch programs, veterans benefits, Medicaid eligibility, and many other programs. COLAs are intended to protect the real value of benefits under federal programs and add desirable certainty for the beneficiaries—often people on limited incomes.
COLAs generate additional costs without Congress’s involvement and place the burden of cutting benefits of those who want to change the policy. The formula for the Consumer Price Index is controversial and the particular version (Consumer Price Index for Urban Wage Earners and Clerical Workers, CPI-W) used for Social Security and other programs is written into law. It, too, can be changed only by new legislation.
Short-term tactics. In recent decades, appropriations (spending) bills often have not been enacted by the start of the federal government’s fiscal year on October 1. In most circumstances, Congress passes a short-term “continuing resolution,” or CR, that authorizes spending, usually at the current rate, until a specified time—a few days, weeks, or months in the future. The expiration date usually is set for political reasons. At times, it merely gives legislators more time to negotiate a final language. Often, the deadline allows for funding until Congress can reconvene after an election. In 2022, the majority Democrats were concerned that they would lose their House or Senate majority in the November elections and so extended spending authority until mid-December—after the election but before the Republican might take control in January.
A Special Case: The Federal Debt Limit
Over its long history, the limit on the federal debt has commonly been a policy that remains in place until changed. However, the politics of the debt have generated a unique set of outcomes, including important innovations in the last decade. The political problems associated with increasing the debt limit have not been solved.
Some background: During World War I, Congress passed four Liberty Bond acts to authorize the sale of government bonds to the general public in order to quickly raise funds for the U.S. war effort. The bonds, of course, would come due with interest, represented borrowing by the government, and were recognized as creating a federal obligation—a federal debt. In the Second Liberty Bond Act, enacted in September 1917, Congress placed a limit on the debt that could be incurred by selling various types of bonds. Critically, in the 1930s, in a series of steps, Congress granted the Treasury Department greater flexibility in creating instruments to raise funds but tied it to an aggregate limit on federal debt.
As a general rule, Congress has refused to give unlimited borrowing authority to the Treasury Department even as it regularly adopted revenue and spending policies that created an annual deficit and forced more borrowing. The result has been frequent—and usually controversial—increases in the debt limit. Figure 30-1 shows the debt limits since the aggregate limit was put in place in 1939. The debt limit at the time of this writing in late 2022 is $31.4 trillion and is about to be reached again.
When Treasury reaches the limit and exhausts extraordinary measures to make payments, a financial crisis is likely. The federal government would eventually miss or reduce payments that it is obligated to make. This would call into question the full faith and credit of the United States, which may lead investors to consider putting their money in other governments’ bonds, move bond rating firms to downgrade U.S. debt, increase the interest rates the U.S. would have to offer for its bonds, and make the existing debt even more expensive to carry.
The obvious differences between the debt limit and other policies that expire periodically is that (a) the conditions that motivate an adjustment in policy (the debt limit) change so regularly and rapidly and (b) there is no second path like appropriations for unauthorized programs to salvage the situation without direct congressional action. Over and over again, the need to raise the debt limit gives legislators who are willing and able to hold hostage a debt limit increase bill a source of leverage. In fact, fiscal conservatives have objected to increasing the debt limit for decades but, in the last two decades, have been more willing and able to delay or block action on debt limit bills. The rise of the Tea Party Caucus and the Freedom Caucus, combined with the enlarged debt after the 2008-2009 recession, played a role. Only with extraordinary efforts has the limit eventually been raised, but fear of reaching the debt limit caused market disruptions several times.
The House, it is important to remember, adopted what came to be known as the “Gephardt rule” in 1979. The rule, named after former Representative Dick Gephardt (D-MO), suspended the debt limit if Congress adopted a budget resolution for a fiscal year. The rule itself was suspended with some frequency during 1980s and 1990s, usually because no debt limit increase was required. The Senate, of course, still had to approve any increase.
2011 was a turning point. The severity of the crisis in 2011 reshaped debt limit policy since then. House Republicans, fresh from winning a new House majority and bolstered by new members who were backed by the Tea Party movement, would not approve an increase until the president and Democratic Senate agreed to a match between the debt limit increase and spending cuts and the adoption of a constitutional amendment requiring a balanced budget. Early in the year, Treasury estimated that the debt ceiling would be reached in May, but an impasse lasted through the first half of the year and ended only after an agreement between Republican and Democratic leadership at the end of July and was enacted as the Budget Control Act of 2011 (BCA) a few days later.
One result of the BCA was the imposition of spending caps on domestic spending and defense spending that would be enforced through automatic cuts (sequestration) when either was projected to exceed its cap in any fiscal year over the next decade. Another result was the repeal of the House Gephardt rule so the House would have to vote on future debt limit changes. The debt limit was raised by $400 billion, but two additional raises could be triggered by the president over the next six months. Under the terms of the agreement, Congress could pass a resolution of disapproval to the president’s increases, but each debt limit increase went into effect when the Senate voted against a disapproval resolution.
The 2011 law set up a decade of spending caps, but it did not do away with the need to increase the debt limit frequently. In fact, the debt limit was reached again in December 2012 and complicated an already complicated fiscal policy situation. The Republican tax cuts of 2003 were expiring at the end of 2012 (a ten-year window set by the Byrd rule) and set up a crisis of its own—tax rates would revert to much higher levels if Congress did not act. Congress was still operating with divided party control of the House and Senate, but it averted disaster with the passage of a new tax law. At about the same time, House Republicans, not in a mood to fight over the debt limit again, agreed to suspend the debt limit for a few months. In May 2013, Republicans would only agree to a debt limit set at the current debt, which forced Treasury to engage in extraordinary measures until October, when the limit was again suspended.
Temporary suspension, it turns out, was more acceptable to Republicans than voting for an increase or being responsible for a default. This continued to be true: in 2013, Republicans had suffered badly in the polls for holding hostage the debt to their demands for budget cuts, which had significant effects on markets and interest rates. Since then, suspensions were enacted in 2013, 2014, 2015, 2017, 2019, and 2023. At first, the suspensions were for a short periods, one to five months, but in 2015 Congress adopted a 17-month suspension. In that year and thereafter, suspensions were adopted as part of an agreement on spending levels for defense and non-defense programs. In each case, the end of the suspension reset the debt limit at a level that compelled Treasury to restart extraordinary measures. The 2023 suspension was for two years and expires in January 2025.
Partisan politics have been central to the ease with which Congress and the president address the need to increase the debt limit. With their own president in the White House and controlling both houses of Congress in 2017, Republicans readily accepted Treasury’s proposal to suspend the debt limit for a couple months and then again relied on Treasury to invoke extraordinary methods. When Treasury needed additional authority, congressional Republicans enacted a suspension that would last until March 2019 to get themselves well past the 2018 elections and the start of a new Congress. Democrats won back the House in the 2018 elections, but Republicans did not stand in the way of a Trump administration request to put in place another suspension, this one to last until July 31, 2021.
In late 2021, the Biden Treasury was back to taking extraordinary measures to shift cash around to avoid exceeding the debt limit, but the a debt limit increase was enacted in December. At that time, Republican leadership appeared to go along with the debt limit increase to take the issue off the agenda for at least the next year. The debt limit was set at nearly $31.4 trillion, which was expected to be adequate until early 2023, when the Republicans hoped to hold congressional majorities. As it turned out, Republicans won a House but not a Senate majority in the 2022 elections. With the Republicans holding a House majority but not a Senate majority or the presidency, a six-month stalemate in 2023 was resolved with agreements on spending caps and a two-year suspension of the debt limit.
A footnote: In 2019, House Democrats, back in the majority and fed up with debt limit politics, reinstated a revised Gephardt rule. The new rule differs from the 1979 rule in two critical ways. First, the House debt limit measure is considered passed when just the House, not both houses, passes a budget resolution. Second, the House action suspends, rather than increases, the debt limit. When Republicans regained their House majority in 2023, they did away with the Gephardt rule. The Senate, of course, lacks a similar rule and a filibuster still stands in the way of increasing the debt ceiling.
Reform?
This is not the place to outline the costs of repeated reliance on Treasury to move funding around to cover debts. They are substantial, easily reaching several hundreds of billions of dollars since 2011. Let’s look at the politics.
Meaningful congressional control of the debt limit has deteriorated. We have moved from a situation in which government borrowing occurred under a debt limit to a situation in which the Treasury operates alternately by borrowing under a suspension of the debt limit and by invoking extraordinary measures. The introduction of conservatives willing to put default at risk and harm the economy in doing so altered the game to the point that Congress punted on the issue. The result of their effort has been the demise of a meaningful debt limit and nearly a decade of tremendous budgetary inefficiency.
The Gephardt rule represented an attempt by the House to minimize the burden of dealing with the debt limit by using its rules to automate a change in the statute. This was reasonably successful for three decades. Fiscal conservatives, however, wanted to assert influence and had their party drop the rule in 2011 so that they had a source of leverage over debt, spending, and tax decisions. Liberal Democrats preferred to make the reversion point whatever debt other policies produced and so readopted the Gephardt rule in a more liberal form in 2019.
Proposals for reform have been floated for decades. The original Gephardt rule reflected frustration with the politically-sensitive votes that legislators had to cast year after year in the 1970s. It is not surprising that the last decade has produced a wave of proposals.
Most proposals reflect the same balance of considerations as Gephardt had in mind in proposing his rule in 1979. That is, if Congress is acting on a collective budget in the form of a concurrent budget resolution, any required adjustment in the debt ceiling should be incorporated to reflect the annual deficit specified in the resolution. The Senate has never done this. Because a budget resolution cannot be filibustered, this would improve the chances that the debt limit would be addressed in a timely way.
Some observers recommend that the debt limit be suspended whenever Congress adopts a budget resolution, at least for the year covered. After all, they argue, the budget resolution provides for a deficit level so no additional debt limit that may prove to be too low should be imposed.
There is nothing to guarantee that the House and Senate can agree on a concurrent budget resolution, of course, particularly with frequent divided party control of the two houses. For this reason, Bill Hoagland, a former Senate Budget Committee staff director, and others proposed that the president be given “fast-track authority” to get a debt limit measure through Congress. Under Hoagland’s version, the president could propose announce a debt limit suspension that would go into effect in, say, 30 days if Congress failed to pass a resolution of disapproval. This power would substantially shift power from Congress to the president.[2]
Other related proposals focus on the budget process more generally in order to more effectively address the underlying spending and revenue issues. Moving away from an annual to a two-year budget cycle is the most common proposal. It is hoped the Congress would make policy choices that remain in place for two years and thereby reduced conflict over those policy choices and creating greater certainty for executive agencies.
These proposals fall short of simply abolishing the debt limit, as Treasury Secretary Janet Yellen and many observers recommend. Proponents of ending the debt limit argue that if the Treasury Department was simply authorized to borrow to cover debts Congress and the president would refocus on the spending and revenue decisions that create deficits. It would eliminate the threat to the economy that a government default might cause.
Congress, of course, can eliminate the debt limit by passing a bill to do so. We would expect a free-standing bill to be filibustered in the Senate so reformers have been looking for another path. The most obvious is to incorporate an end of the debt limit in a reconciliation bill, but the Congressional Budget Act implies that a reconciliation bill may reset but may not abolish the debt limit. An alternative approach is to simply set the debt limit so high in a reconciliation bill that reaching the limit is not an issue, at least for many years. With narrow Democratic majorities and the views of some moderate Democrats unknown, at least to me, it may not be possible to accomplish this in 2021.
[1] Time is central to legislative politics. Gathering information and building coalitions takes time. Delay may allow conditions to change and alter outcomes; it also may impose costs for some people and generate benefits for others. Deadlines and emergencies may force compromise. Logrolls take time to be implemented. The passage of time can increase or decrease uncertainty and can be used to change minds. Legislative activity can be sequenced to secure commitments and shape outcomes. Terms of office shape the ebb and flow of incentives to legislate. And human psychology is sensitive to time—impatience can be exploited. These are topics that have received attention and deserve more.
[2] William Hoagland, Shai Akabas, and Tim Shaw, “Its Time to Rethink the Debt Limit,” Bipartisan Policy Center, January 5, 2021 [https://bipartisanpolicy.org/blog/its-time-to-rethink-the-debt-limit/].