The Debt Ceiling: What Is it, Why Do We Have It and What Do We Owe?

Includes images, video and charts

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This is what U.S. federal debt looks like in physical dollars (and bear in mind that today’s debt has grown to more than $17 tirllion). Image by demonocracy.info

And here I was just starting to get my government shutdown groove on.

I mean, without the thrill of waking up every morning to the debt default doomsday machine ticking down to the brink of economic catastrophe, life honestly seems a bit mundane. At least Congress didn’t go too nuts and actually resolve the issue;  they just went ahead and did what any rational group of people do when confronted with a difficult situation: they put it off for another day — you know, kicked the can down the road. Anyone smell a sequel? (And yes, I’ve already reserved front row tickets for Round 2 in January. I hear it’s gonna be awesome. My sources tell me that before the final death match, John Boehner reveals himself as President Obama’s real father).

But seriously … With the stroke of a pen, the government sputtered back to life last Thursday morning after Obama and Congress ended a 16-day political standoff that had left large swaths of the federal government shuttered and put the U.S. at risk of losing it’s ability to borrow money. The compromise allows federal agencies to resume operations, reopen public facilities and abruptly end the unpaid staycations of hundreds of thousands of furloughed employees.

Struck just minutes before the midnight deadline, the 11th-hour deal allows the government to raise the debt ceiling, which means increasing the limit on how much cash the Treasury Department is allowed to borrow to pay its bills. Failing that agreement, the government would have either been forced to make massive budget cuts, default on its debt, or both.

So, crisis averted? Well, only kind of.In fact, even though Republicans conceded defeat, the deal only finances the operations of government through mid-January. And although the debt limit has now been raised, it’s only a temporary measure set to expire on February 7 (allowing the Treasury to issue as much debt as needed, but only until then). All of which means that the same set of issues and battles and headaches and annoying prime-time news countdown clocks are lurking just around the corner.

So what’s the deal with the debt ceiling?

budgetbreakdown chartBottom line: it’s expensive to run a country. And as countries go, America is a particularly high-roller. The federal government’s revenue stream, which it mainly collects through payroll and income taxes, doesn’t begin to cover the vast amount it spends. Take fiscal year 2012 (which ran Oct. 2011 – Sept. 2012): the government spent roughly $3.5 trillion (that’s 3.5 with 12 zeros after it), but less than $2.5 trillion of that was financed by federal revenues, according to the Center on Budget and Policy Priorities. That left a deficit of about $1.1 trillion — what the government needed to borrow to cover its bills, just for that year. — which gets added on to the nation’s ever-growing debt (as of Oct. 21, it was just over $17 trillion, according to the Treasury Department).

The majority of the government’s spending falls into three areas: defense, social security, major health programs and, to a lesser extent, safety net programs.

So to cover those costs, the Treasury Department borrows money — lots of money — to make up the difference between what it takes in and what it spends. And the amount it’s allowed to borrow for this purpose is known as the debt ceiling (or debt limit).
When the Treasury Department reaches that limit — as it did this spring with a debt of $16.7 trillion  —  the administration asks Congress to raise the ceiling in order for the government to keep the lights on. And therein lies the drama.

Then why do we even have a debt ceiling (’cause it really seems like no one really likes it)?

The debt ceiling was established in 1917 to address concerns over the nation’s borrowing to pay for World War I as well as to give the Treasury Department more freedom to decide on how it spent that borrowed money. Before that, Congress had to vote on exactly how much it would spend and what it would spend it on. In line with many other Western European and North American nations, indebtedness has been a fact of life throughout the America’s financial history (in fact, the only year in our entire existence that we’ve been in the black was 1835, during the extreme small-government reign of President Andrew Jackson). Since 1917, the debt ceiling has been raised more than 100 times, but until the mid-1970s, it generally didn’t spark a huge amount of political controversy.

In the early 1980s, though, federal spending rose significantly, and so too did debt. By 1981, Congress had passed a $1 trillion debt ceiling, (provoking a 16-hour filibuster by Wisconsin Democratic Senator William Proxmire, an outspoken critic of government waste). By the end of the 1980s, the federal debt had risen to $2.8 trillion. The Reagan Administration raised the ceiling a total of 18 times, the most of any president, according to a Guardian analysis. And every president since — both Democrats and Republicans — has raised it no less than six times.


(Figures compiled by The Guardian Datablog; sources: BEA, US Treasury, White House)

And to whom do we owe this massive sum of money?

To answer this, NPR’s Planet Money put together the following graphic based on data from several federal agencies. Note that it includes debt owed to the Social Security trust fund and other federal funds, which are sometimes excluded when calculating the debt for other purposes.

us debt-planet money

Source: Federal Reserve; FMS; GAO; Social Security Administration
Credit: Quoctrung Bui/Planet Money

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