Why the U.S. Govt. Should Keep The Debt Ceiling (and why your company should have one too)

The debt ceiling is the maximum amount of debt the U.S. federal government can take on before needing approval from Congress. In essence, it is the debt limit for the country. There are calls to get rid of the debt ceiling from elected officials on both sides of the aisle. They make great arguments including:

1) The executive branch of the government will operate more efficiently without needing to get a debt ceiling approved from Congress.

2) Not raising the debt ceiling on time causes government shutdowns, which lead to layoffs for some individuals and stall the paycheck of others who may be one paycheck away from bankruptcy or financial catastrophe.

3) Increasing the country’s debt limit does not authorize new spending. The debt increased is already known and implied when Congress approves the initial spending package.

4) If the debt ceiling isn’t raised after a certain period of time, the whole economy could crash and the world could lose faith in the U.S. government’s ability to pay back its debts.

With so much on the line, doesn’t it make sense to just get rid of the government’s debt limit to prevent economic Armageddon? To answer that question, we need to understand what the debt ceiling is. Before the debt ceiling existed, Congress issued new debt when each spending package was approved. The amount of debt that was issued corresponded to the total amount needed to pay for the items in each spending package. Before 1917, this was how things worked. The debt ceiling was created in World War 1 as a way to give the executive branch of the United States flexibility. With the debt ceiling, Congress told the President the maximum amount of debt that the government could take on, and the executive branch had the flexibility to issue debt on its own terms as long as it stayed below the maximum amount. At the time, giving the executive branch this much flexibility seemed radical. Desperate times did call for desperate measures. We were at war, after all.

Today, the debt ceiling doesn’t operate the way it was intended to. It is often used as a mechanism to pressure the executive branch to vote on spending packages that reflect the ideological priorities of the opposition party. Holding the fate of the whole economy in the hands of ideologues in Congress is a scary thought. I understand the sentiment of those who wish to get rid of the debt ceiling as a whole. I also believe that people who hold this view don’t see the long term consequences of getting rid of the debt ceiling.

1) Getting rid of the debt ceiling could make government less stable

Governments worldwide tend to be more stable when many people are in charge of important decisions. Getting rid of the debt ceiling puts more power in the hands of the President and takes away an important lever of government that Congressional Representatives use to influence government. Taking that lever away is not a good idea in a time when many experts believe that granting more executive branch power increases the risk of losing democratic institutions.

2) Getting rid of the debt ceiling discourages bipartisanship

This may seem counterintuitive. If ideologues are using the debt ceiling to get their way, how is the debt ceiling encouraging bipartisanship? I believe two things can be true at the same time. The debt ceiling as it exists makes it easier for people in Congress to push for things they want even if those things are seen as extreme. However, getting rid of the debt ceiling makes it easier for the executive branch to push for things the President wants without the opposing party being able to use it as leverage. Keeping the debt ceiling requires the President to spend more time at the negotiating table with regional Congressional Representatives. I believe the outcome of the budget is closer to what citizens want when more negotiating is required between the executive branch and the legislative branch.

3) Getting rid of the debt ceiling increases the potential of long term waste, fraud, and abuse in government

What does the debt ceiling have to do with waste, fraud, and abuse? It goes back to Congress having oversight of the executive branch. Presidents are immune from penalties of “official acts” they take in office. This makes it easy for a President to give out big government contracts to people who helped them get in office without following the recommended competitive bidding process. If Congress notices a President is doing this, the opposition party can use the debt ceiling as a leverage point to get a budget that is harder for a President to manipulate for personal gain.

How is this relevant to big companies and organizations outside of government?

While giving executives flexibility in debt can allow them to respond faster to emergency situations, lack of oversight can hamstring an organization for decades. I have seen organizations ranging from large companies to small churches make things really hard on themselves because there was no oversight over the debt the executive was taking on for the organization. This can happen for a variety of reasons. It could be as innocent as a chief executive wanting to increase growth, to as nefarious as a C-Suite official trying to give contracts to personal friends. I believe requiring approval from boards that represent ownership before taking on new debts can prevent a lifetime of headaches. Yes, giving C-Suite executives flexibility is an important way to increase efficiency and the speed of business. However, when it comes to debt, it is important to require executives to present a business plan for approval to their board that includes:

1) What the debt will be used for

2) Why taking debt out is the best option

3) The repayment plan of the debt

Having oversight that requires broad approval before new debt is taken on safeguards an organization from big problems. In most cases, whether you’re in Congress or corporate America, this layer of oversight outweighs the relatively minor benefits of allowing executives to take out debt without permission.

Murtaza “Murti” Khan

Blog posts are intended to be short informal reflections, not all inclusive content. Every organization is in unique circumstances and there are exceptions to all best practices