There used to be a good reason to have a debt ceiling. It was preferable to the previous system of selling government bonds:

So how did we end up with this system anyway? According to a thorough report from the Congressional Research Service, Congress used to authorize each and every one of the Treasury's debt sales. Then, in 1917, to ease financing for the United States' entry into World War I, it set an overall limit—the debt ceiling—and let Treasury issue as many Liberty Bonds as it needed to within that limit.

Now, budget wonks argue, the ceiling is no longer really necessary, given Congress' budgetary power and process—as well as the realities of the budget itself. "It used to help control the amount you could appropriate," explains Stan Collender, a partner at Qorvis and longtime budget watcher and expert. "But so much of the debt is mandatory now." He continues: "The truth is: You shouldn't have to raise the debt ceiling separately. The debt ceiling should be raised automatically when Congress agrees to a conference report on a budget resolution. That's how it's supposed to work. It is an anachronism."

The federal budgetary process was very rudimentary in the early 20th century. Appropriations were basically done on an ad hoc basis, with no overall direction. In the late 1800s, cabinet secretaries collaborated with committees on the Hill to figure out what to spend independently.

This was changed with the Budget and Accounting Act of 1921, which created a more unified process: the Bureau of the Budget as a new part of the Treasury Department, and a legislative auditing agency, the GAO (General Accounting Office) to provide independent technocratic expertise to Congress directly. This made the budget more transparent, as all spending and revenues for the entire federal government were coordinated by one executive agency. It also required that all spending go through one legislative committee:Appropriations, and newly created sub-committees would roughly mimic the organization of the executive branch.

In 1939, the Reorganization Act carried out the recommendation of the Brownlee Commission and created the Executive Office of the President, which also allowed the President more control over the executive branch. That was a major reason to locate the Bureau of the Budget there (renamed the Office of Management and Budget in 1970), along with economic advisers, so the budget came to be more of a statement of policy goals by the President.

The Congressional Budget and Impoundment Control Act of 1974, further changed the federal budget process. This created Budget Committees in both houses who were tasked with designing an annual budget resolution, which set overall revenue and spending targets, to limit the power of individual Appropriators to increase the deficit. It also created the reconciliation process to further reduce the roadblocks to reducing deficit.

The budget resolution is not signed by the President, and the Impoundment clause was written to prevent then-President Nixon from refusing to spend legally appropiated funds (He claimed he was 'impounding' them). This could be seen as an attempt to catch up to the expansion of federal power in general, and the executive branch in particular.

Voting to appropriate certain funds is a de facto increase in the debt ceiling. If you do not want more debt to be issued, all you have to do is not vote for a budget that increases the deficit. Once you have voted to spend X, but raise less than X in revenues for whatever reason, you have chosen to create debt. Throughout all these changes in how the government spends money, and more importantly, decides how to spend it, the debt ceiling remained.

Of course maybe something could have been done about it 2010, but we are where we are. Republican leader Eric Cantor has already said they will increase the debt ceiling, so there is no reason at all to negotiate. Wall Street Banks have gained a lot from buying Treasury Bonds after getting basically no interest loans from the Federal Reserve. If interest rates spike due to fear of fiscal insolvency, they will lose BIGTIME. I am sure they will let their corporate subsidiary, the GOP, to play politics and make brash demands to placate their base, but not when it comes to their bottom line.

The Obama Administration can increase the pressure - for example giving payments to defense contractors and Medicare providers such as hospital chains in IOUs - let the Republicans' own constituents pressure them. Or pay all federal employees in IOUs - will banks refuse to cash a check from a soldier?

conservative economist Bruce Bartlett claims that the consequences that could arie from not passing an increase might themselves be unconstitutional

Furthermore, it’s worth remembering that the debt limit is statutory law, which is trumped by the Constitution which has a little known provision that relates to this issue. Section 4 of the 14th Amendment says, “The validity of the public debt of the United States…shall not be questioned.” This could easily justify the sort of extraordinary presidential action to avoid default that I am suggesting.

The debt ceiling is sort of like the filibuster - a mechanism left in place because it wasn't really used as a partisan cudgel or a hostage. But there is no excuse at all to accept any spending cuts or legislative riders to free the latest hostage. There will be plenty of time for that when the FY2011 budget runs out on September 30th.

Originally posted to bay of arizona on Mon May 16, 2011 at 12:34 PM PDT.

Also republished by Community Spotlight.

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