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It's mainly politics and the desire to avoid doing what Steve Horwitz lists as options. The immmediate impact of hitting the ceiling would be that parts of the government would shut down. Isn't that what happened at the state level in Minnesota?

Speaking of Tim Geithner's credit card, this might bring a chuckle:

http://www.tylerawatts.com/uploads/Fed_Unlimited_Rewards_2.pdf

Steve,
Your observations are exactly to the point. The government certainly takes in taxes, currently, more than enough to meet interest and maturity payments that are coming due in the months ahead.

What the government does not have in current revenues, as I understand the numbers, is the ability to meet its debt obligations AND fund out of taxes all other budgetary expenditures promised or "required" under current legislation and "mandates."

Thus, as Jerry observes above, it would be necessary to cut, reduce or shut down various domestic programs. This would require the Congress and the president establishing spending priorities as to what gets completely funded, what gets only partly funded, and what is unfunded.

Inescapably, this means that various Democratic and Republican constituencies will not have some of their current programs paid for, or "transfers" financially covered.

Besides the "uncomfortableness" for politicians to have to tell their respective voting groups that they are not getting their promised "goodies," these groups have become accustomed to receiving greater or smaller portions, or all, of their relative income shares from government spending and redistribution.

Reducing or eliminating any of these by necessity imposes financial "disappointments" on these groups. Their budgetary expectations are "frustrated." Hence, we see the types of demonstrations and riots that have gone on in Greece, or (in a more limited way) in some state capitals around the United States.

The "costs" of cutting government are "concentrated" on the network of special interest groups that especially feed at the trough of the government, while the "benefits" of a rebalanced and sounder fiscal environment for the economy as a whole, is "defused" over time among all the members of the society.

Thus, no one wants to be the bearer and implementer of the fiscal reality. There are few short-run gains, but many short-run "costs," politically, from doing so.

Richard Ebeling

This what (former) Judge Michael McConnell, US Court of Appeals for the Tenth Circuit says:

"If we reach the debt limit, the Treasury will be compelled to reduce spending (other than payments on the public debt and pensions) to bring current expenditures in line with current receipts, just as a family has to do when it has maxed out on its credit cards. Presumably, the executive branch will have to make the tough decisions about priorities."

http://www.advancingafreesociety.org/2011/07/04/the-debt-ceiling-is-certainly-not-unconstitutional/

THE WORLD WILL NOT END.

The lead article in today's Wall Street Journal confirms that its is simply a case that on Aug. 2bd the Treasury will lose the ability to pay "all" its bills. This is not bankruptcy, which is a legal concept and to which the US government cannot be subject. It is not even insolvency.

Many individuals and businesses have experienced cash-flow problems. They defer payment of some bills. Payable in 10 days becomes paid in 30 days, and so on.

Larry Lindsey had an excellent op ed on June 28th in the WSJ on why the deficit is much worse than reported. The Administration is reling on implausibly high growth forecasts in its revenue projections. Rebasing to trend growth adds $4 trillion to the debt. Further, a return to normal interest rates would add many hundreds of billions to debt service.

The proposed tax increases can't even do a serious dent to these estimated additions to the debt. Obama's proposals only for about one year (in 10) of the higher interest costs. I note that the argument for the taxes is no longer they are needed, but it's just "fair" to raise taxes.

Only draconian spending cuts will work.

People have made a lot of good points here. The debt ceiling calls for one level of debt, and the budget and revenue bills passed by congress clearly imply another, incompatible requirement for debt.

The executive must then fail to follow some legislated mandate. But which one?


There would appear to be at least 3 options:

1. Ignore the debt ceiling on the grounds that the more recent budget and revenue bills imply debt in their structure, and thus override the debt ceiling.

2. Slash programs that will affect ordinary voting americans immediately in a negative way, to exact a political price on the republicans, perhaps having the effect of prolonging or deepening the recession (in the Keynesian framework that some would argue guides the administration). All with political gain in mind.

3. Somehow come up with a lot of money. State governments sometimes raise fees if they can't raise taxes. I have no idea how this could possibly fill the gap. Perhaps the IRS could interpret their way to a revenue increase. But this just seems too politically risky. maybe selling off Mt. Rushmore or some zany gimmick.

Anyway, something has to give. The administration probably has more options than are immediately obvious.

I'd put money on number 1. (I like long odds).

@Nike Shox Clearance: Amen.

It is unconstitutional to default on the national debt (Fourteenth Amendment). It is constitutional to have a debt ceiling in the sense that only Congress is authorized to approve the issuance of more debt. Therefore, the executive must prioritize spending to use existing revenue to pay the interest.

As McConnell says in the previously linked post:

"Section Four of the Fourteenth Amendment does not create a back-door method for the Administration to borrow more money without congressional authorization. For Congress to limit the amount of the debt does not “question” the “validity” of the debt that has been “authorized by law.” At most, it means that paying the public debts and pension obligations of the United States, as they become due, has priority over all other spending. Each month, the Treasury takes in about $175 billion in new revenues. These are more than sufficient to pay principal and interest when due, as well as pension obligations. (Social Security, by the way, is not a “pension” obligation within the meaning of this provision. The Supreme Court held in Fleming v. Nestor that Social Security claims are nothing more than promises to pay, not legal obligations to pay.)"

Anything else is a failure to execute the law as it stands.

The bottom line is that if the government fulfills it's debt obligations as they come due, they will have to reduce or eliminate domestic spending in various directions.

That is the reality they, the politicians, the special interest groups, and ideological advocates of the interventionist-welfare state do not want to face.

Unfortunately, governments and societies have been plagued with this problem in modern times. When the Great Depression was only starting to set in, Ludwig von Mises discussed this in a lecture he delivered at the Vienna Industrial Club in December 1930, at a time when Austria was running budget deficits and was hard put to meet its international debt obligations.

He explained:

"The errors in our fiscal policy stem from the theoretical misconceptions that dominate public opinion about financial matters. The worst of these misconceptions is the famous, and unfortunately undefeated, idea that the main difference between the state's and the private sector's budget is that in the private sector's budget expenditures have to be based on revenues, while in the public sector's budget it is the reverse, i.e., that the revenue raised must be based on the level of expenditures desired.

"The illogic of this sentence is evident as soon as it is thought through. There is always a rigid limit for expenditures, namely the scarcity of means. If the means were unlimited, then it would be difficult to understand why expenses would ever have to be curbed.

"If in the case of the public budget it is assumed that its revenues are based on its expenditures and not the other way around, i.e., that its expenses have to be based on its revenues, the result is the tremendous squandering that characterizes our fiscal policy.

"The supporters of this policy are so shortsighted that they do not see that it is necessary, when comparing the level of public expenditures with the budgetary expenditures of the private sector, not to ignore the fact that enterprises cannot undertake investments when the required funds are used up instead for public purposes. They only see the benefits resulting from the public expenditures and not the harm the taxing inflicts on the other parts of the national economy."

But it is argued, you cannot cut back on these government programs. They are "entitlements."

Mises replied to this argument by saying:

"Whenever there is any talk of decreasing public expenditures, the advocates of this fiscal spending policy voice their objection, saying that most of the existing expenditures as well as increases in expenditures, are inevitable. Any notion of applying the concept of austerity to the machinery of the public sector is to be rejected.

"What exactly does 'inevitable' mean in this context? That the expenditures are based on various laws that have been passed in the past is not an objection if the argument for eliminating these laws is based on their damaging effects on the economy. The metaphorical use of the term 'inevitable' is nothing but a haven in which to hide in the face of the inability to comprehend the seriousness of our situation. People do not want to accept the fact that the public budget has to be radically reduced."

Mises then went on to propose ways and means to reduce the size and scope of government in Austria and its provinces, and in ways to reduce the resistance by special interests and the bureaucracy.

That is our task in America today.

Richard Ebeling

I don't understand how debt limits even make sense. If the president honors the Congressional debt limit then he has to dishonor either Congressional appropriations or Congressional revenue laws. If he honors appropriation bills he dishonors the debt limit.

Congress has passed conflicting legislation.

What is typical in that case?

I would think it would make the most sense to follow the most recent legislation - namely the appropriation bills. Don't we usually think that more recent legislation that conflicts with older legislation overrides that older legislation?


The whole "maxed out your credit card" analogy is wrong, I think. This is not a credit card we've maxed out. People are still happy to give us credit. This is an arbitrary restriction that has nothing to do with the line of credit available to us.

But a credit card limit can be self-imposed. I used to have a single $3000 credit card, however I had more credit available to me through the same bank and most likely others. I chose the $3000 limit to impose discipline on my own spending. 'Maxing' that card out to me would be spending the full $3000, even though more credit was theoretically available.

Whether such an arbitrary limit is appropriate in congress' case is a separate debate of course.

Greg -
That does make sense, but why do we care about maxing out self-imposed credit limits on credit cards?

Because there are consequences.

We made an agreement with our credit card company and we'll face higher interest rates or other penalties if we break that agreement, even if its self-imposed.

Are there any similar consequences of breaking the self-imposed debt limit here? I'm not aware of any.

No analogy is perfect, and you raise a good point on this analogy. I suppose I should have gotten straight to the point: our creditors don't care about this credit limit.

If Daniel thinks there are no negative consequences to continuing to borrow at the rate we're borrowing, that might explain is puzzlement at my argument.

I think my response to Daniel went in the spam hole. To summarise, it said that self-imposed credit limits represent how much we're willing to have our future spending curtailed by repayments, and that this part of the analogy can still be extended to government debt.

To Mario's point, the Left is arguing that the 14th Amendment authorizes the president to spend regardless of the debt ceiling. The Left wants him to declare the debt ceiling unconstiutional.

I think there will be blood in the street if this issue is decided by appeal to the 14th amendment. It will be Bush v. Gore redux.

Steve -
Well, first it depends on exactly what you mean by "continued", but if you mean what I think you probably mean, then of course I think there are consequences.

I just find the whole idea of it to be silly, that's all.

Markets seem to me to provide plenty of consequences and price signals. I know why pundits and politicians latch on to this, but I'm not sure why an ad hoc political limit we set on ourselves should be of all that much interest to economists.

The deficit is expenditures minus revenues. Congress sets the rules to collect revenues. Congress sets expenditure levels. It seems weird for Congress to set debt limits on top of that. That simply introduces the potential for contradictions in law (the president can't simultaneously honor appropriations, tax, and debt limit legislation).

I would have just thought the limits on debt levels should be set in the market for government bonds.

Jerry,

There is a legal issue and an economic issue. At this moment, the legal issue interests me more. I think McConnell's analysis is persuasive. However, I can see Obama using the argument (that most legal scholars reject -- but what else is new for the man who doesn't think Libya's bombing constitutes "hostilities") that the debt limit is unconstitutional and thus to spend and pay interest as usual. But it seems not only reasonable legally, but economically, for the president-Treasury to prioritize the spending on their own -- pay the debt interest and cut some stuff.

Plenty of politics here though.

I still haven't heard an argument that spells out why the debt ceiling legislation has priority over ordinary revenue and spending bills.

All of these are constitutional but in order to say that Obama must cut spending one needs to show that the debt ceiling is somehow superior to revenue and spending legislation.

I don't think that the 14th amendment is even necessary for the debt ceiling to be effectively nullified (not declared unconstitutional) for the time being. If this went to the supreme court, I would expect them to rule that Given "the national debt shall not be questioned", and conflicting legislation, the executive must choose which law(s) not to follow.

As I said before, This puts the administration at considerable liberty, given the likely logjam between the Republican House and Democratic Senate. I think it's likely that Obama will selectively cut spending, but it's possible that he'll take one of the other options available to him.

I agree strongly, argosyjones.

Forget the 14th amendment. I'm not clear on how Obama can't break one of these two laws (appropriations laws or debt limit laws).

What do we do in other situations where laws conflict?

Shouldn't we just do that here?

What the government should tax and spend should be limited by the Congress. If Congress wants to limit debt, they should tell the president to spend less or tax more.

As long as the Congress tells the president to tax and spend at a rate that will increase the debt, what the hell are they complaining about? If our creditors don't want to extend us credit that's one thing. But Congress shouldn't simultaneously tell us to run deficits AND not run deficits.

The Congress is saying: Spending is allowed subject to a constraint. This should be easy for economists to understand. Now if the constraint is violated the question is: What should the tax revenues coming in be spent on? They could be spend on the various programs and let the bond holders go to hell.

Now the Supreme Count has already said that, for example, Social Security payments do not constitute a contractual obligation on the part of the US government. Now, given this, and given that the debt obligation is contractual, it would seem that the Social Security payments and any others not considered -- legally -- contractual obligations get lesser priority.

It is the executive's obligation to enforce the law. So it would be up to Obama to cut the requisite amount of spending. (If the debt ceiling is not raised even for a week or two the effect on aggregate government spending would be small. But the politics would be large.)

All of this is not -- or need not be -- a significant short-term economic problem. It is (good) political theater.

Mario -
On what basis do you prioritize the debt limit over the appropriations law?

Congress has ordered the president to spend certain monies. Congress has ordered the president to raise certain revenues. Congress has ordered the president not to issue more than a certain debt level.

What is it about the debt limit that you think deserves such obvious prioritization?

You write: "It is the executive's obligation to enforce the law. So it would be up to Obama to cut the requisite amount of spending."

It seems to me that if Obama does this he is violating appropriations laws.

The government is contractually obligated to pay interest on the debt. It has the income to service and roll over the existing debt. Yes, it cannot increase the total amount of debt.

So we are left with one legal alternative: cut spending. It is not, by Supreme Court decision, contractually obligated to pay Social Security and -- presumably -- other similar payments. Therefore, this is all "discretionary" in the relevant sense here.

So to enforce the law it must prioritize. Obama does not violate appropriations laws because they are all spending-appropriations subject to constraint. The government never had the authority to spend up to the limit of the appropriation laws if that meant exceeding the debt limit.

The prioritization is in part based on the difference between contractually-obligated payments and other spending and in part on the executive's discretion under the circumstances.

I am not saying this is ideal but I am saying there is a straightfoward legal way out of the "crisis" is Obama will take advantage of it.

I think recalling James Buchanan's and Richard Wagner's argument in "Democracy in Deficit" (1977) would be useful on much of this discussion.

They argue that prior to the Keynesian Revolution there was a form of an "unwritten fiscal constitution." It was argued that the fiscal prudence that applied to an individual or a family was also relevant to the government: it should only spend within its means (income or revenue earned).

Yes, there might be reasons to borrow by an individual or a business (capital investments, short-term "emergency" circumstances), but such borrowing should be for prudent returns expected from an investment that would enable the loan to be paid off in the future. And one should certainly not try to live off borrowing beyond one's ability to pay back that which had been borrowed in terms of consumer loans, etc.

The same should be done by the government. But, in addition, it was necessary to place restraints on the incentives of politicians to offer spending in the present without a clear indication of the "costs," which taxes makes very clear.

Either the the advocate of government spending must demonstrate to the electorate the benefits that justify imposing new taxes to pay for those expenditures, or what existing program(s) should be reduced to make room for the new or increased spending in a different direction without taxes going up.

This would tie "benefits" to "costs" in the arena of government, just as the individual faces when he shops in the marketplace and must weigh the costs and benefits of his purchases, given his own budget constraint.

And if government were to borrow for an emergency (say, a war), it should be paid off when the emergency had passed.

(One of the clearest statements of this argument in the 19th century may be found in Henry Fawcett and Millicent Garrett Fawcett, "Essays and Lectures on Social and Political Subjects" (1872), Chapter 6: 'National Debts and National Prosperity.' It has an extremely "modern" ring in terms of the borrowing abuses of government today.)

Just as we have constitutional restraints on government in matters of civil liberties, because short-run rationales and passions of the moment can always seem to justify abridging such freedoms as speech, press, assembly, religion, search warrants, etc., so, too, there is a basis of arguing for restraints on government's ability to borrow, such as a balanced budget rule imposes.

A limit on government debt forces those in the political arena to justify borrowing more in the present against the burdens and risks of the longer run for the citizenry in terms of higher future taxes, higher rates of interest (due to possible default risk premiums) on additional government borrowing, the "cost" of more resources being shifted to governmental uses as the expense of the private sector, etc.

Thus, the rationale for such borrow limits seem reasonable and desirable in a world of potentially unlimited government giveaways.

Richard Ebeling

After further reading I'm going to try and state the other side of the argument, which I understand better now, but haven't heard in simple terms.

1. The constitution authorizes congress to issue debt, not the executive branch.

2. Historically this meant that congress would approve each debt issue individually, until the current system came about, and the treasury was granted discretion by congress to issue debt up to the "ceiling" as it is now known.

3. Therefore, the executive branch can't issue further debt without breaching the separation of powers, and any such debt would be of dubious authenticity, rendering the effort precarious.

4. Constrained on one hand by the 14th amendment "shall not be questioned" clause, and on the other by the constitutional inability to issue debt absent an express grant by congress, the executive has no choice but to cut spending somehow.

I haven't been able to find the text of the relevant legislation (debt ceiling) online anywhere. Because I don't know how to find it. But this argument depends on the language of the legislation, which nobody seems to even be able to quote. Probably it's spread around in many different bills.

It seems like an absurd situation, but I now believe that it it is the case.

Whatever the merits of a balanced budget amendment, the present debt ceiling arrangement can only succeed in constraining spending in the case of a strange division between the house and the senate somehow they have to agree on taxing and spending decisions, but not on the implied debt.

I heard on the radio that 40% of current federal spending is financed through debt. This is going to be interesting. Considering the magnitude of the implied cut, I think it is almost certain that a deal will be struck before things get too hairy.

All of this suggests that it might not be a bad idea if it were made explicit that the government cannot pass laws that are violations of previous laws without explicitly overturning those laws.

If this is even half right, the 14th amendment stuff is utter crap: http://reason.com/blog/2011/07/06/jobs-are-the-new-terrorism

Just to be clear: There are two 14th Amendment arguments. One is "crap." This one from the link above --

"Garrett Epps’ 14th Amendment theory is a transparent fraud. Epps posits that Amendment XIV, Section 4 of the U.S. Constitution gives the president the unilateral authority to borrow more money on top of the federal government’s existing $14.3 trillion debt."

Judge McConnell's argument which also invokes the 14th Amendment is simply that the US must pay the contractual interest on existing debt and that the executive branch must see to it by cutting other spending rather than by exceeding the debt limit.

"All of these are constitutional but in order to say that Obama must cut spending one needs to show that the debt ceiling is somehow superior to revenue and spending legislation."

When you were a kid spending your parents' money on you and your friends, at a certain point, your parents had to step in and stop you spending their money regardless of the wild promises you made to your friends. While others might be willing to continue to extend credit to the kid, the parents who are obligated to fund the kid's profligacy may not be willing to fund it at some point.

Creditors will not limit government spending. They will continue to fund governments. The only question is the interest rate at which they are willing to do so.

argosyjones -
The exact same clause of the Constitution that gives Congress the sole authority to issue debt gives Congress the authority to appropriate money.

Which raises the same question with you - on what basis do your prioritize the debt issuing authority of Congress over the appropriation authority of Congress? Mario's view seems to simply be that the debt limit is prioritized because the debt limit is the constraint (seems like a restatement of the claim to me... I'm still not sure WHY he thinks this - perhaps he has one I just don't know what it is).


This can't be the only situation where Congress passes conflicting laws. I doubt they always strike out sections of prior laws. So how does it usually get decided? My guess is more recent laws get somewhat more priority. The most recent debt ceiling law was in February 2010. There are mutliple appropriations bills of course, but I believe continuing resolutions have all been passed since February 2010. This seems relevant to me.

One principle of "conflict of laws" is to interpret them (if plausible) in a way that resolves the conflict.

I'm not clear what Mario thinks. I don't support the idea that it would have any priority because of its nature as a constraint. I agree with you that recent legislation should and does have priority.

I think you understood my last comment properly: The debt ceiling is not on higher ground, but the executive is not allowed to issue debt on its own account absent specific congressional grant of authority.

You make a good point about the legislature's exclusive authority of appropriation. legislation constrains the president's ability to refuse to spend budgeted money. So he can't do that without approval of both houses of congress, either. There's a decent discussion here.

So my revised (again) understanding is:

The executive is constrained by:

1. Fourteenth Amendment "debt shall not be questioned" prohibiting default.

2. Existing Revenue Legislation (No time for this route anyway AFAIK).

3. Existing Appropriations bills, which the president can't refuse to honor, since the anti-impoundment act.

4. The Debt Ceiling, prohibiting the treasury from issuing more debt.

So yes, barring congressional resolution of the conflict, the president must break the law. I've flipped and flopped in 24 hours!

PShere Is Garret Epps' "14th amendment renders the debt ceiling unconstitutional" argument, for anyone who wants to read it.

According to the most recent issue of the Economist, it would be "economically illiterate and disgracefully sinful" to try to reduce the deficit without raising taxes at all. "Even Ronald Regan," they say, "raised taxes when he needed to."

Clearly, they acknowledge, out-of-control spending is the main problem in this debt-ceiling debate. However, they cited a study done earlier this year by House Republicans stating that historically an 85/15 split between spending reduction and tax raises has been successful at promoting fiscal consolidation. Can anyone explain to me what is the logic of raising taxes during a time of fiscal consolidation if the growth in spending is the real problem?

A debt limit doesn't require current revenues to pay principal. As payments on principal need to be made, money can be borrowed to pay it.

However, with a debt limit, all current expenditures, including interest expense, must be paid out of current revenues.

I am not exactly sure why there is this strange notion that it is natural to borrow money to pay interest. Do people really think that current taxes pay for expenditures that provide current benefits, and then, the national debt just grows with interest?

The debt limit isn't a limit on the total that must be paid on the funds borrowed--principal plus total interest. It is the total that can be borrowed. (Or at least I think so.)

As for our big spender theory that Congressional appropriations have priority over borrowing limits, why not have the President just unilaterally raise taxes?

Anyway, I think the common sense solution is to meet contractual obligation and quit making discretionary expenditures, and return to Congress and till them to come up with more money (raise taxes or approve more borrowing) or else reduce appropriations.

As Mayor (for a while, we lost of the Supreme Court,) that is exactly what I would do.

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