When the statutory debt limit was instituted in 1939, its explicit goal was to limit congressional spending—which is supposedly still its purpose today. Technically, if the debt nears its statutory limit, the Treasury cannot issue new debt to manage short-term cash flows or manage the annual deficit and the government may then be unable to pay its bills.
Obviously, that worked for a while. The chart above shows increases in the federal debt and the statutory debt limit since 1940. From 1940 to the beginning of the 1980s, the debt and its limit grew slowly. However, during the 1980s both the debt and the limit started increasing faster. Almost each year during this period, Congress would pass a new law raising the debt, though it didn’t systematically grow the debt to the level capped by the limit.
It took a Republican in the White House and a Republican Congress to change that. In 2005, for the first time in history, the debt limit had to be extended after the debt had already gone $487 billion above the cap. This happened again in 2009, after the debt issued by the Treasury went above the limit by $1.5 trillion. Finally, this year the debt has already outgrown the limit by more than $2 trillion, which explains the need for a second increase of the cap in less than two months.
Many lawmakers will argue that they have to raise the limit because, by law, the debt must be below the limit. However, raising the debt cap is only a symptom, not the cause, of the bigger problem. Namely, the federal government’s endless appetite for spending.
In practice, the debt limit is a very poor budget constraint because it does not alter either the spending or revenue policies that determine debt and deficits. Think about it this way: If you want to lose weight, the only solution is to reduce your current weight. Just telling yourself that you can’t gain an additional 30 pounds in the next year won’t help. In fact, it will only make things worse. Congress needs to stop spending money rather ruling that it should simply increase the debt by more than $2 trillion this time around.