Debt-Ceiling: An Absurd, Unnecessary Law

The debt-ceiling circus in Washington continues as I write this.  The Republicans seem bound and determined to ruin the “full faith and credit” of the United States, while President Obama is frustrated that the Republicans won’t accept his deals to cut Social Security and Medicare.  None of this is necessary.  We don’t need a debt ceiling.  It’s absurd. It’s counterproductive.  It’s self-destructive.

James Surowiecki of The New Yorker writes (emphasis is mine):

The truth is that the United States doesn’t need, and shouldn’t have, a debt ceiling. Every other democratic country, with the exception of Denmark, does fine without one. There’s no debt limit in the Constitution. And, if Congress really wants to hold down government debt, it already has a way to do so that doesn’t risk economic chaos—namely, the annual budgeting process. The only reason we need to lift the debt ceiling, after all, is to pay for spending that Congress has already authorized. If the debt ceiling isn’t raised, we’ll face an absurd scenario in which Congress will have ordered the President to execute two laws that are flatly at odds with each other. If he obeys the debt ceiling, he cannot spend the money that Congress has told him to spend, which is why most government functions will be shut down. Yet if he spends the money as Congress has authorized him to he’ll end up violating the debt ceiling.

As it happens, the debt ceiling, which was adopted in 1917, did have a purpose once—it was a way for Congress to keep the President accountable. Congress used to exercise only loose control over the government budget, and the President was able to borrow money and spend money with little legislative oversight. But this hasn’t been the case since 1974; Congress now passes comprehensive budget resolutions that detail exactly how the government will tax and spend, and the Treasury Department borrows only the money that Congress allows it to. (It’s why TARP, for instance, required Congress to pass a law authorizing the Treasury to act.) This makes the debt ceiling an anachronism. These days, the debt limit actually makes the President less accountable to Congress, not more: if the ceiling isn’t raised, it’s President Obama who will be deciding which bills get paid and which don’t, with no say from Congress.

What happens if they don’t vote to raise the debt ceiling? Nobody knows.  There’s lots of scenarios.  It all depends on how crowds of people react and how those same crowds think the others in the crowd will react.  It’s unpredictable.  Interest rates might go up, they might go down, they might stay put.  Two things are for sure, though.  There will be lots of trading and uncertainty in financial markets with increased volatility.  And more important, if a default translates into the government actually spending significantly less money next month than now, then GDP is for sure going down.  Any government spending cut of greater than 10% immediately puts us back into recession – maybe even less.

So what’s really going on?  Well both the Republicans in Congress and President Obama are trying to accomplish non-budget goals that they can’t do by normal means.  Both are trying to radically scale back aspects of government that are too popular to do head-on.  They’re trying to cut Social Security, cut Medicare, raise the age on Medicare, change Obama’s healthcare plan, and other things that polls show are very popular.  So they’re trying to do it under cover of “having to for the debt”.  Except that they don’t have to do it.  The debt-ceiling law is totally unnecessary and contrived.

This Is No Movie Folks. It’s Real and It’s Scary.

I don’t enjoy scary movies. Never have.  I also don’t enjoy scary “amusement” park rides.*  I know I’m kind of a fluke in our U.S. culture this way.  I just find that there’s enough excitement, thrills, and fright in the real world if you just open your eyes.

An example of real world things to be scared of is the current debate  childish tantrum in Washington over increasing the debt limit. I’ll admit I haven’t taken it seriously until now.  A couple months ago I called it Kabuki Theatre of the Absurd. The law itself, the debt “ceiling” law, is absurd.  It is also redundant. Raising the debt ceiling should be a like sending a form letter.  Routine. Perfunctory. The law should be simply done away with. If Congress doesn’t want to borrow more money then the time and place to make that point constitutionally is when the budget is adopted.

The Republicans and Tea Party types were unable to accomplish their goals of gutting Social Security, Medicare, and other programs when the budget bill was debated last March-April.  They simply didn’t have the political support and they couldn’t agree on just who to cut.  So instead of doing the constitutional thing and either win more elections and gain seats (they actually lost a special election in May because of their plans to cut Social Security), or waiting until the next budget for next year, they’re trying to accomplish their goals under a subterfuge.  It’s not about the debt. It’s not about the deficit.  If it were about debt, deficits, and “fiscal responsibility”, then closing tax loopholes for high-income folks like hedge fund managers and the commodity speculators that drive up oil prices would be an option.  But the Republicans and Tea Partiers have expressly stated that even closing a tax loophole is unacceptable.  Only spending cuts are acceptable.  So the truth is it’s not about “fiscal responsibility”.  It’s about eliminating government programs that people want as the New York Times explains today (possible paywall on link).

So back to the debate tantrums being thrown in Washington. I still expect there to be a last-minute deal when powerful folks on Wall Street give the call to their friends in D.C. and tell ’em to knock it off and do it. In the meantime, the Republicans, Tea Party types, and Obama administration are playing a game of chicken.  Except that this is a bit different from movie versions of chicken.  Jeff Frankels provides an excellent analysis. The problem is three-fold: it’s not movie fantasy – it’s real, the folks in the Republican car aren’t rational and are fighting among themselves, and when these cars go over the cliff there’s a good chance they take our entire economy with them. Quoting Jeff:

In the 1955 movie Rebel Without a Cause, James Dean and a teenage rival race two cars to the edge of a cliff in a game of chicken.  Both intend to jump out at the last moment.  But the other guy miscalculates, and goes over the cliff with the car.

This is the game that is being played out in Washington this month over the debt ceiling.  The chance is at least 1/4 that the result will be similarly disastrous.

The game is not symmetric.  The Republicans are the ones who are miscalculating.   Evidently they are confident of prevailing:  they rejected the President’s offer, even though he was willing to cut entitlement programs.

The situation is complicated because there are a number of different people crammed into the Republican car.    There is one guy who is obsessed with the theory that, come August 3, the federal government could retain its top credit rating if it continued to service its debt by ceasing payment on its other bills.  But this would mean failing to honor legal obligations that have already been incurred (paying suppliers for paper clips that have already been bought, paying soldiers their wages for last month’s service, sending social security recipients their checks, etc.).  This is like observing that the cliff is not a 90 degree drop-off, but only 110 degrees.   It doesn’t matter: the car would still go crashing into the ocean far below.   The government’s credit would still be downgraded and global investors would still demand higher interest rates to hold US treasuries, probably on a long-term basis.

There are other guys (and gals) in the car who are even more delusional.   They are dead set on a policy of immediately eliminating the budget deficit (e.g., those opposed to raising the debt ceiling no matter what, or those campaigning for a balanced budget amendment), and doing it primarily by cutting nondefense discretionary spending.  This is literally impossible, arithmetically.  But they honestly don’t know this.   It is as if they were insisting that the car can fly.   Sometimes it can be a good bargaining position to adopt a very extreme position.  But if you are demanding that the car flies, you are not going to get your way no matter how determined you are.

It seems likely that the man in the driver’s seat – House Speaker John Boehner – does realize that his fellow passengers don’t have the facts quite right.   But there is also a game of chicken going onwithin the Republican car.  The crazies have said they will oppose in the next Republican primary election any congressman who votes to raise the debt ceiling or to raise tax revenues.   (Yes, they think they would support someone who would eliminate the budget deficit primarily by cutting non-defense discretionary spending; but remember, this is arithmetically impossible.)   The guy who is riding shot-gun in the car – the one who believes the car can fly — is trying to put his foot on top of Boehner’s on the accelerator pedal.

Yes, people who cannot do basic arithmetic are in charge here. And they’re throwing a childish tantrum because they can’t get their way.  Only unlike a child who’s threatening to hurt themselves if they don’t get their way, these folks could potentially take us all down.

The facts are that nobody knows for sure what happens if Congressional Republicans don’t raise the debt ceiling by August 3. But it defies imagination to think it will be smooth sailing. It depends on how the Obama adminstration reacts.  There might be ways around it.  A couple of proposals exist. The government could dispute the constitutionality of the debt ceiling law or it could mint some super-large coins (such as billion-dollar coins) that would only be used as Marshall Auerbach has noted:

Or the President could, as we and others have suggested in the past), simply invoke the 14th amendment and refuse to enforce a statute that he believes violates the Constitution.

Professor Scott Fullwiler has suggested an even more creative way around the debt ceiling: Fullwiler notes that Fed is the monopoly supplier of reserve balances, but that the US Constitution bestows upon the US Treasury the authority to mint coins (particularly platinum coins). Future deficit spending by the federal government could thereby continue to be carried out by minting coins and depositing them in the Treasury’s account at the Fed (for more details see here).

Curiously, the President won’t pursue any of these options.

These options would keep financial markets on an even keel but could provoke a constitutional and legal crisis as the Tea Party types would not doubt file endless lawsuits challenging it.  But thinking about these options is largely academic since Obama shows no inclination to exercise these options or to explain why he doesn’t.   Obama shares responsibility because he’s let the Tea Party types and Republicans take this charade this far.

Let’s consider a more likely intermediate case.  As mentioned in another post, to immediately stop all new borrowing and instantly balance the budget, the government has to cut 40% of it’s spending right now.  The federal government accounts for $3.8 trillion of spending in 2011.  GDP is expected to be in the $15 trillion range.  If the government cuts 40% of that $3.8 trillion instantly, that’s a $1.5 trillion cut in spending. Government spending is part of GDP (despite what far right-wing types believe).  So an instant balancing of the budget on Aug 3 means a 10% cut in GDP.  When the economy collapsed in 2008 it was only approximately a 5% drop in GDP.  So the “intermediate” case of default is an instant recession twice as big as the “Great Recession” of 2008.  Apparently the Republicans and Tea Party types loved 2008-09 and the bailouts so much they want to repeat it and double down.

Now what’s the worse case?  Well add into the scenario a financial crisis to dwarf 2008.  See US bonds are AAA rated because there’s no chance of default.  If there’s a default, or even a slight increase in the possibility of a future default, then pension funds, banks, and central banks around the world no longer have safe, interest bearing assets.  Chaos. Pension funds have to sell bonds.  Bond prices drop. Interest rates rise. Banks lose capital as the bonds fall in value. Nobody knows which banks are worst off.  A mess to make 2008 look simple.  And guess what, we’ll be back to bank bailouts only with even more unemployment.

Why can’t we have grown-ups in Washington?  These kinds of scary scenarios should be fictional and in the movies.  It shouldn’t be national policy to deliberately default and crush the economy just to make some political policy victory that you couldn’t win straight up.

 

* racing cars in real life is different.  😉

Arithmetic, Reality, and Dreams of A Balanced Budget

Apparently, the Republicans and Tea Partiers are insisting that the federal government budget be balanced immediately (the demand for no increase in the debt ceiling) and that it be done entirely from spending cuts (the “no tax increases” pledge) to discretionary spending.

This is enough to demonstrate that they simply are not dealing in reality and cannot do simple 2nd grade arithmetic.  I’ve commented before and in classes about how politicians simply cannot deal with large numbers – they confuse millions, billions, and trillions.  McCain on the campaign trail once insisted that approximately 100 different cuts of 1-50 million dollars each would be enough to close a trillion dollar deficit.  Only off by a factor of, oh, 2000 times!

The budget deficit is running approximately 40% of the total budget.  In other words, to bring spending down to the level of current tax collections, we would have to cut 40% of government spending.  Yet, a simple perusal of the government’s budget (the one they passed just 3 months ago), shows that non-defense discretionary spending is only 15% of the budget.  Even if we add in defense and completely shut down the entire armed forces and fire lay-off all soldiers, we only have 38% of the budget.  It still wouldn’t balance.

I don’t know what’s worse.  The fact that these politicians keep saying these things even though a child can tell you it won’t work, or the fact that the news media keeping repeating it without the slightest challenge, or the fact that apparently millions of Americans believe them.

Debt Ceiling: Kabuki Theater of the Absurd

Tuesday evening the House of Representatives voted on whether to raise the so-called “debt ceiling”.  It was pure charade.  No, it’s worse. It’s kabuki theater of the absurd.  First off, the House Republican leadership knows it’s only for show.  The reality is that Congress will vote to raise the limit later this summer.  They have no choice.  The whole concept of the debt ceiling is absurd and likely unconstitutional. Let’s see the news itself, this taken from ABC News:

The House of Representatives rejected an increase to the statutory debt limit in a move chastised by Democrats as “a political charade,” “political cover” and “political theatre.”

The measure, which failed by a vote of 97-318 with seven members voting present, stated that “the Congress finds that the President’s budget proposal, Budget of the United States Government, Fiscal Year 2012, necessitates an increase in the statutory debt limit of $2,406,000,000,000,” and would have raised the debt limit to $16.7 trillion.

All 236 Republicans voted against the increase – joined by 82 Democrats. 97 Democrats voted yes for a debt limit increase, while 7 Democrats voted present.

The bill required a two-thirds majority to pass.

Why was it a charade? Because the Republican leadership designed it to be a fake.  This from Time mazazine’s website (bold emphasis is mine) just before the vote:

Not be a spoiler, but Tuesday evening’s House vote to increase the federal borrowing limit by $2.4 trillion without preconditional spending cuts will fail. It was designed that way by the Republican leadership: They used a procedural trick to require a 2/3 majority for passage and told every member of their caucus to vote against it. The idea, they say, was to prove to the world (and congressional Democrats) that raising the debt ceiling won’t happen without a package of accompanying spending cuts.

Mission accomplished: President Obama has been admitting as much for weeks and House Democratic Whip Steny Hoyer on Tuesday recommended that Democrats join Republicans in voting down the “clean” debt limit measure. “My advice to them would be not to play this political charade,” he said. Of course, the failed vote is the charade. Time to play spoiler again: Congress will raise the debt ceiling by the end of the summer. Tuesday’s failed vote only serves to provide political cover for members of Congress who will eventually back the incredibly unpopular increase in borrowing capacity.

Now supposedly Wall Street and the financial markets understand that Congress isn’t really serious about intentionally defaulting on U.S. bonds.  The New York Times in it’s report on the vote:

“Wall Street is in on the joke,” said R. Bruce Josten, executive vice president of the U.S. Chamber of Commerce.

So the whole point is so that members of Congress can claim on the campaign trail that they voted against the debt ceiling increase when in fact they are also going to vote for it later this summer.  Absurd.  Pure theater. It’s all political pretend.

Beyond the politics, though, the economics is even more absurd.  First, the concept of a “debt ceiling”, a law that saws the government cannot borrow more than say $x dollars is absurd.  How much the government needs (or chooses) to borrow is basically already decided by legislation already passed that goes by the name “budget”.  Congress voted a budget not two months ago that requires, under current rules, more borrowing.  Now Republicans are claiming they don’t want to borrow the money they already committed themselves to borrow.  Got that? So are you following so far?  The House Republican leadership schedules a vote that it knows must fail (that’s why the special 2/3 requirement).  Why? So it can tell one thing to voters on the campaign trail while letting Wall Street “in on the joke”.  We have the best government Wall Street can buy.

But it’s doubly worse than just the lies they’re presenting to voters.  It’s all over what should be a non-issue.  Normally, I don’t like analogies between government and a household because such analogies don’t usually hold up very well.  Government, unlike a household, is not inherently budget-constrained.  But let’s try a simple analogy anyway.  Suppose you put together a budget for your household.  You project or know that you are going to earn $1000 per month.  So income is $1000.  Then you decide that you need to spend $1500 per month in outlays.  You have no savings. You are going to have deficit of $500 per month.  No problem, you have a credit card.  You can borrow to finance the deficit*.  Let’s suppose your credit card account has no credit limit.  The bank is saying you can borrow as much as you like.  In fact, the bank right now is telling you that you are such a good credit risk that you only have to pay 3% interest rates.  Under this scenario there’s no problem, right?  You need the extra $500, you borrow it.  The credit card balance goes up.  But there’s no limit to how high it can go.  That would be the government’s ordinary, constitutionally-mandated budget making process.

But sometime ago Congress decided to add another wrinkle.  It passed a “debt ceiling” law.  Supposedly this is another law, that independent of whatever the budget says, will limit how much total debt the government can have outstanding at one time.  Using our analogy, this is like the head of your household saying that they refuse to borrow more than $x on the credit card, regardless of what they previously said was their budget.  So two months ago, Congress passed the budget with a deficit.  It told the government to buy lots of things and not to collect very much taxes.  Now Congress wants to say they won’t pay.  Huh?  In the private world, this is called an unnecessary, voluntary default.

Yes, that’s what this vote says.  The Republican leadership has just told the world that they actually want the U.S. to default on bonds now!  There’s no economic reason why we need to default.  The financial markets are saying they actually want to lend money to the U.S. at record low interest rates.  The financial markets have long been saying they have no fears about the ability of the U.S. to pay in the future.  No matter. The House Republicans want to default just for the heck of it.  Well, actually it’s not for the heck of it.  They are holding the entire U.S. budget hostage, including payments to seniors, soldiers, and Medicare, because they want to change the future of Medicare and Social Security.  They want to end to programs and privatize everything for the benefit of Wall Street.  Such an agenda is hugely unpopular, so the Republicans can’t do it directly.  Instead they have to create a fake crisis about the public debt, hold a fake vote, and threaten national insolvency to get their way in cutting Medicare and Social Security.

*The whole issue is even more absurd when we consider how my analogy breaks down.  The analogy breaks down because the government doesn’t have to borrow to finance a deficit – it can just spend the money by creating new “high-powered money” which are also called bank reserves.  When the government spends, it just writes a check off the Federal Reserve bank.  It doesn’t have to have “money” in the checking account first.  When The Fed “cashes” the check, it pays your commercial bank with “bank reserves”.  Bank reserves aren’t really “money” in the public’s hands yet, but they can be thought of as “potential money”.  Unlike the primitive days of a century ago, there’s no artificial limit on how much can be spent.  There’s no gold standard.  (that’s a good thing!).

I do believe this is all theater of the absurb.  But it’s dangerous theater. I still believe that when the time comes this summer, Wall Street will call the political leaders and tell them enough’s enough, raise the limit and avoid default.  A default is much too dangerous to contemplate.  A default by the U.S. could bring economic disaster globally.  There’s always the possibility that these folks in Washington dig in their heels and let their egos get the best of them.  They don’t understand what they’re playing with, but that’s never stopped them before.
In the meantime, we’re treated to the spectacle of House Republicans claiming they would prefer the U.S. default now because they’re afraid that without big emergency spending cuts the government will end up defaulting at some point in the future.  Default now to avoid default in the future.  Yeah, I call that absurd.