The United States’s debt limit permits the federal government to spend money it does not have to pay its bills. The debt limit was suspended in mid-2023 through Dec. 31, 2024, allowing the federal government an unlimited amount of credit during this period. That period has now ended, forcing the debt limit to be raised and the Treasury Department to use “extraordinary measures” to manage the federal debt under the debt limit for several months or risk a government shutdown — or worse yet, a default.
The suspended debt limit was $31.4 trillion, a number that few can appreciate. To put this into perspective, the total wealth of the 12 richest people in the nation (around $1.8 trillion) is less than 6 percent of the debt limit. This is why when politicians ask for “billionaires to pay their fair share,” there are simply not enough billionaires to make a dent in the accumulated fiscal imbalance faced by the government.
Note that the unofficial national debt clock puts its value at over $36 trillion, around $5 trillion more than the suspended debt limit.
With so much national debt, the interest costs have been exploding over the past two years, coinciding with the Federal Reserve raising interest rates in 2022. In the most recent fiscal year, ending Sept. 30, 2024, interest costs were $882 billion, on par with the Department of Defense budget. Fiscal 2025 will see interest costs soaring well past $1 trillion.
Given that the federal government continues to spend more than it takes in, the national debt continues to grow, forcing Congress to raise the debt limit, eliminate the debt limit, risk the government shutting down or default. The last government shutdown was in 2018-2019, during Donald Trump’s first term.
Not surprisingly, Trump wants to eliminate the debt limit completely. As a person who has used debt as leverage in real estate, he understands this quite well.
Given the political capital (and time) that must be spent periodically raising the debt limit, this begs the question: Is Trump correct in calling for it to end?
The debt limit always ultimately gets raised, though it is sometimes delayed. What the debt limit does is force Congress to discuss federal spending and revenue. Without such discussions, the status quo would continue flying under the radar, effectively increasing the national debt with no reason to pause and allow the American people to know what the debt limit has become.
Given the magnitude of the national debt, and the growing percentage of the federal budget dedicated to interest needed to service this debt, there is no way to end this economic death spiral. As long as people, corporations and countries are willing to buy U.S. government Treasury bills, there is no urgency to force structural changes that can reduce the federal deficit and begin to peck away at the national debt.
As the bond ratings agencies have noted, a growing debt burden places undue fiscal strain on the nation. And with prospects for reducing this debt remaining bleak, further bond rating downgrades are not only possible, but imminent.
This may be one of the factors driving up the value of bitcoins. Given that this cryptocurrency is not tied directly to a government, trust in it has grown. The value of one bitcoin recently touched $100,000, suggesting that faith in this currency is growing relative to the U.S. dollar.
The last time that the U.S. government had a budget surplus was in 2001. However, even that was sleight of hand, given that the Social Security surplus was counted as part of the federal budget. Of course, as the Social Security surplus becomes a deficit, the federal budget deficit will grow even more quickly, forcing the need for even more debt limit increases.
What the debt limit symbolizes is that we as a nation have been mismanaging our finances for quite some time. Every time Congress must act to raise the debt limit, it is a reminder of this fiscal irresponsibility and excess. Of course, many people do not feel this way. Over 11 percent of the population live below the poverty line. Few, if any, of them would agree that their lifestyle is overladen with excesses.
However, collectively, the nation has been living far too excessively. The challenge is reeling in such excess.
Some may hope that the incoming president finds a way to shrink the size of the federal government. His proposed Department of Government Efficiency (DOGE) demonstrates outside-of-the-box thinking.
There is no doubt that the federal government is woefully inefficient. Much of this is due to redundancies and safeguards put into place to protect the government’s interests. Removing such redundancies and safeguards could save money in the short term. They will, however, shift some of the costs to state governments (like unemployment benefits to those no longer employed) and federal food programs (like SNAP). The recession that would likely occur if federal spending is significantly reduced, without a commensurate increase in private-sector spending, could be catastrophic.
The federal debt limit has no practical value. This suggests that ending it would be a good idea. Yet the laws of unintended consequences suggest that there are unforeseen effects that may be worse than the seemingly useless exercise to discuss it and raise it periodically.
What few discuss is that a fiscal cliff looms somewhere in the future. When — not it — we fall off it remains an open question. What is certain is that such a fall is imminent.
Sheldon H. Jacobson, Ph.D., is a professor in computer science in the Grainger College of Engineering at the University of Illinois Urbana-Champaign. He used his expertise in risk-based analytics to address problems in public policy.
