In an era where Congress repeatedly spends up to the federal debt ceiling and then increases it, is there any meaning to debt limits?
Is it a signal about the evolution of fundamentals characterizing fiscal policy?
Is it an upper bound on actual and anticipated government borrowing under normal conditions? Is it designed to constrain anybody, and if so, did it ever work?
Thomas J. Sargent’s research shows that up to 1939, when Congress set a debt limit, they meant it.
Sargent, a Becker Friedman Institute Distinguished Research Fellow, and colleague George Hall are conducting in-depth research on the fiscal history of the United States that shows how the nation funded its growth, wars, and infrastructure over time.
Between 1776 and 1917, there was no aggregate debt limit, Sargent noted in a recent talk. “Every bond was designed by congress; they designed the coupon, the par value, the maturity, the whole thing,” he explained. Each bond was usually issued for a specific purpose, with a limit on the amount that could be issued. After bonds matured, they couldn’t be reissued.
Sargent and Hall are in the process of tracking down every single government bond ever issued. Adding up the value bond-by-bond, they are calculating the implied aggregate debt limit.
Faced with enormous debt after World War I, Treasury Secretary Andrew Mellon asked Congress for the authority to design and issue bonds in ways that would promote orderly and liquid markets. In contrast to earlier Secretaries of Treasury who had made similar requests, Congress granted Mellon's request.
Congress kept writing the bonds until 1939, when it established four standardized Treasury securities: bonds, notes, bills, and TIPS, and set a formal debt limit.
Sargent’s time series comparing the implied or official debt limit to actual debt shows that once Congress authorized the Treasury to issue debt, spending skyrocketed. “Now the debt limit is not a forecast of the upper bound of spending. It’s just a stopping time, when [Congress] has to raise it again,” Sargent said.
Their work shows that different institutions over time and different rules lead to different outcomes—with interesting insights for today’s fiscal challenges.
—by Toni Shears