We Should Scrap The Federal Debt Limit
February 18, 2002
In a few weeks, Congress will have to raise the public debt limit, which is a ceiling on the authority of the Treasury Department to borrow money. The debt limit applies to a decreasing portion of the government's total indebtedness, most of which rises without the slightest congressional scrutiny.
As a means of controlling federal indebtedness the debt limit has demonstrably been a failure. Why is this? First, an increasing share of the debt subject to limit is held internally in government accounts. Second, more and more of the government's total indebtedness is not subject to the debt limit.
The formal debt limit applies to the gross federal debt, including debt held by the public plus that held in trust for Social Security, highways and airports, and other purposes.
These latter debts are internal and do not require the Treasury to borrow from the general public.
- The portion of the gross debt held by the public has sharply declined from 75 percent in 1990 to 57 percent last year, mainly due to growth of debt held in "trust" (see figure).
- The off-budget debt is mostly accumulating in what are called "government-sponsored enterprises" or GSE's, which include Fannie Mae. At the end of October, these agencies had outstanding debts of more than $3.1 trillion.
- The debt held by the public was just $3.3 trillion. However, the Federal Reserve held $534 billion of that, and since the Fed is part of the government, that leaves a net debt of $2.8 trillion.
Thus GSE debt effectively exceeds the national debt.
Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, February 18, 2002.
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