The Debt Limit Explained

The debt limit is kind of a financial weapon of mass destruction chained to the United States government by the United States government. Confused? Then it's time for The United States debt limit Explained.

To understand the debt limit, you need to know the US splits financial responsibility between the president and congress. The president has two jobs when it comes to money: 1. Collect taxes and... 2. Spend those taxes to run the government. This might give you the impression that the president, with regards to money, is all-powerful, especially when you hear news reports on 'the president's new budget' or his plan to 'raise taxes on haberdashers' or 'lower taxes on apiarists.' But reality is just the opposite, and the president is the one who takes orders. From whom? Congress.

Congress has the jobs of setting the tax level and determining how much the government will spend by writing a budget. So while the president does get to submit budgets to congress, and asks for changes in the tax level, these are just requests that congress doesn't have to pay attention to. Congress can add or subtract anything they want from the president's budget or throw it out entirely and write a new one. The same goes for the level of taxes. So congress decides what it wants: bridges, tanks, buildings, courts, robots on Mars, robots on Earth, National Parks, whatever, and approves a budget with that stuff in it.

Once approved, the president is required by law to spend the money Congress listed in the budget and pay for it using the taxes that congress set. As long as more taxes come in than spending goes out, everything is fine. But, almost always, Congress puts more stuff in the budget than they cover with taxes, which means the president must borrow money to cover the difference. In most countries, the story ends here because if their legislatures approved more spending than they have income, they've also implicitly approved the necessary borrowing -- but not in America.

Here, Congress also limits the total amount of debt the United States can have. A debt limit sounds like a good idea until you see the real-world consequences of these two branches of government interacting. As the total amount borrowed gets closer to the limit, Congress usually points to the president and acts shocked, shocked that his reckless spending has brought us so close to the debt limit that they, reasonable, prudent Congress, have set.

And while it's technically correct that the president has borrowed this money, congress has forced him to do it by approving a budget that the president is legally obligated to spend without also approving the necessary taxes to cover that spending. So the debt limit fight is essentially the government version of the playground favorite: 'stop hitting yourself' except with added terror for everyone watching.

For, it's important to note, the debt limit is not about future spending -- it's not a credit card on which the limit will be raised so a crazy government party can be thrown -- the debt limit is about paying bills already incurred. For example, the government hires a company to repave a federal highway. But if the US is at the debt limit, when the company asks to be paid after the work has been done, the government can't. This shakes trust in the US, and since large parts of the global economy depend on the dollar being trustworthy, messing with that trust is a big deal.

But there is a way out: Congress can raise the debt limit, and, because of the aforementioned terror, they always have. So… if not raising the debt ceiling is potentially disastrous and the solution is simple and always taken in the end: why does this debate last months‽ Because: politics.

The debt limit isn't in the constitution, congress created it themselves, and from their point of view, the debt limit is awesome because: 1. It creates a problem that 2. Congress can (technically) blame on the president, who 3. Needs the solution that only they can provide. Congress gets to use the threat of mutual financial self-destruction as leverage in negotiations that they benefit from extending until the last… possible… second.