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Dancing with the Debt Ceiling

Summary:
Even in 2013, a year of partisan rancor, Democrats and Republicans agreed to suspend the US federal government’s debt ceiling just a week before the Treasury ran out of cash reserves. But this year might be different. BERKELEY – In 2011, when still vice chair of the US Federal Reserve, Janet Yellen reassured her colleagues that drama around the federal government’s debt ceiling “usually turns out to be just theater.” Theater of the absurd, one might add. A decade later, the debt-ceiling debate is shaping up as a tragedy for the ages. The Bretton Woods Credibility Crisis Samuel Corum/Getty Images Behind the Modern Malaise

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Even in 2013, a year of partisan rancor, Democrats and Republicans agreed to suspend the US federal government’s debt ceiling just a week before the Treasury ran out of cash reserves. But this year might be different.

BERKELEY – In 2011, when still vice chair of the US Federal Reserve, Janet Yellen reassured her colleagues that drama around the federal government’s debt ceiling “usually turns out to be just theater.” Theater of the absurd, one might add. A decade later, the debt-ceiling debate is shaping up as a tragedy for the ages.

To understand the absurdity of the debt ceiling, recall its origins. The statute creating it was adopted in September 1917, in conjunction with an act authorizing the issuance of bonds to help finance US entry into World War I. It was designed to assure opponents of US involvement in the war that there were limits on how far the country would go.

The Constitution had given Congress the power to micromanage borrowing by the Treasury, something that was impractical in wartime. So legislators now delegated this power to the president. But to placate those who opposed any enlargement of executive powers, as well as German-Americans who opposed going to war with Germany and Irish-Americans opposed to allying with Britain after that country’s violent suppression of the 1916 Easter Rising for an independent Ireland, Congress placed a ceiling on that...

Barry Eichengreen
Barry Eichengreen is Professor of Economics at the University of California, Berkeley; Pitt Professor of American History and Institutions at the University of Cambridge; and a former senior policy adviser at the International Monetary Fund.

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