Our Debt Ceiling Nightmare

This week, our rudderless, riven and ineffective Congress returned to Washington. At some point, the media, and perhaps Congress itself, will wake to the fact that in early November the Treasury Department will run out of any ability to borrow the money needed to pay our federal government's bills, and we will stare into the maw of a debt ceiling crisis.
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This week, our rudderless, riven and ineffective Congress returned to Washington. At some point, the media, and perhaps Congress itself, will wake to the fact that in early November the Treasury Department will run out of any ability to borrow the money needed to pay our federal government's bills, and we will stare into the maw of a debt ceiling crisis.

If triggered, a debt ceiling crisis would be a constitutional and fiscal nightmare of the first order. From the time of Alexander Hamilton to today, this country has never dishonored its debts and other financial obligations, but that is exactly what a debt ceiling crisis would entail.

Many citizens understandably are inured to the various budget crises to which we have been subjected in recent years, and it is easy to conflate a debt ceiling crisis with a government "shutdown." Congress is responsible for both, of course, because under the Constitution Congress alone controls government spending, taxing and borrowing. The Executive Branch must spend what Congress directs it to spend, and therefore cannot refuse to spend money on what it perceives as wasteful or socially undesirable programs. And from the other direction, the Executive Branch cannot create new obligations of the government that have not been legislated by Congress. Further, under the Constitution, Congress alone determines what taxes can be collected, and Congress must authorize all of Treasury's borrowings.

A deficit arises when government outflows (spending) exceed inflows (tax revenues). Whenever the government runs a deficit (almost every year in memory, other than at the end of the Clinton administration), that deficit necessarily must be financed by new borrowing, to fund the gap not covered by incoming tax revenues. Congress alone controls the level of our tax revenues as well, so every side of the equation - tax revenues flowing in, spending flowing out, and borrowing to cover any shortfalls -- is directly the result of Congressional mandates.

A government shutdown occurs when Congress fails to authorize and appropriate through legislation the funds necessary to keep government services functioning. A debt-ceiling crisis arises when Congress remembers to authorize and appropriate funds necessary to keep government running, but neglects to allow the Treasury Department to borrow the money to pay the resulting bills.

A government shutdown randomly destroys value and our international standing by interrupting for a period the ability of government to function in an orderly manner, and calling into question our ability to govern ourselves, but a debt ceiling crisis is much more serious in its economic and institutional implications, because it represents a direct dishonoring of our government's obligations to everyone to whom money is owed. For this reason, we have been very fortunate never to have faced the cataclysm of actually triggering a debt ceiling crisis.

The debt ceiling itself is a booby-trapped designed by Congress to explode in its own face, all for no good reason. Originally Congress exercised its Constitutional obligation to authorize government indebtedness by doing so on a borrowing-by-borrowing basis, but that obviously is infeasible in light of the amount of outstanding Treasury debt and the speed at which financial markets move. As a result, Congress for many decades has given the Treasury blanket authority to borrow money, up to a specified ceiling. But that ceiling is not directly tied to spending or deficits -- it is just an arbitrary figure that must periodically be raised, so long as Congress also mandates that the government run deficits.

The trap that Congress set for itself is thus that Congress regularly enacts spending legislation that inevitably will yield deficits (because Congress has set tax revenues too low relative to that spending), which deficits must be funded by borrowing, but in devising the debt ceiling Congress did not establish a corresponding mechanism to spontaneously raise the debt ceiling to cover the deficits that its own legislation would generate. The crisis comes when the Executive Branch spends the money it is required by law to spend, collects the revenues it is authorized by law to collect, is left with a completely predictable shortfall, and then cannot borrow the funds to pay for the bills that have been incurred at the direction of Congress because Congress has not authorized the borrowing by raising the debt ceiling.

The failure to raise the debt ceiling to enable the United States to borrow the funds necessary to honor its financial obligations would trigger global financial and economic crises, as well as domestic constitutional ones. The role of the U.S. dollar as the global reserve currency would be quickly eroded, and the price paid by the United States to borrow once the crisis was resolved would surely increase significantly. Meanwhile the Executive Branch would find itself on the horns of a constitutional dilemma, because it would be required to spend money it did not have, and prohibited from borrowing the money to pay for that spending.

In years past, under Republican and Democratic presidents and legislatures, Congress dealt with the implicit conflict internal to its rules by routinely raising the debt ceiling, sometimes several times a year. These laws were never ultimately controversial, but did allow marginal actors to huff and puff on a national stage for a few days before the inevitable enactment of a higher debt ceiling. During 2011, however, the debt ceiling became a weapon used by the Republican party in Congress to extract major concessions from a Democratic president. The predictable results were public disgust with the political process, still further polarization of the two political parties, and the first downgrade of the credit rating of the United States by a commercial credit rating agency. That downgrade was a reflection on our political process, not our ability to pay our bills as they came due.

Now marginal political actors on the far right of the Republican majority in the House of Representatives can be expected again to try to lever the absolutely necessary increase in the debt ceiling to obtain political concessions, like defunding Planned Parenthood. Some of these actors appear confused as to what the debt ceiling is all about, and think that by refusing to raise it they are applying the brakes to government spending, but what they really are doing is agitating for the United States to dishonor the financial obligations that Congress itself required the federal government to undertake. A debt-ceiling crisis has nothing to do directly with controlling government spending. Borrowing is the result of spending, not the other way around, and the spending in question is designed and made mandatory by Congress's own legislation

Others believe that any tactic, no matter how vicious and self destructive, is appropriate in the service of their values. It is as if all the rest of us are dealing with a debtor armed with a bomb, who threatens to blow himself and us sky high before he will pay his debts, unless we give in to his unrelated demands. There is no moral high ground in threatening to destroy a 225-year-old history of ultimate fiscal probity, or in conniving to dishonor one's own financial obligations to gain a political victory.

Presumably for strategic reasons, the Obama administration in 2011 and 2012 did not articulate what it would do if a debt ceiling crisis actually were triggered. One idea mooted by Republican legislators eager to downplay the impact on ordinary citizens of the crisis they wished to precipitate was that the executive should prioritize payments, so that Treasury bonds and Social Security checks, for example, would be paid on time and in full. But prioritization rests on an uncertain constitutional footing, as all claims against the U.S. government, whether for a federal employee's salary, rent owed to a landlord of property occupied by a government agency, Social Security benefits, or interest due on Treasury debt, are equally valid and probably have equal priority as a constitutional matter. Treasury's computer payment systems distinguish between payments on Treasury obligations and everything else, but within that second category do not distinguish payments by the character of the underlying claim, just by the amount due. As a result, it is not clear that a prioritization program could be implemented as a mechanical matter, beyond prioritizing Treasury bond payments over all other "full faith and credit" obligations.

From the other direction, Democratic pundits argued that the President could ignore the debt ceiling as itself unconstitutional, because the Constitution directs the President to do nothing to question the "validity" of the national debt. But not paying debt is not the same as questioning its validity. Bankrupts acknowledge their debts to be valid -- they just cannot pay them. And this suggestion ignores the fact that the Constitution vests in Congress the power to authorize borrowing. Other ideas were still more fantastical in their thinking, such as the idea that, because Congress authorized the Treasury to create collectible-style coins out of certain rare metals, the Treasury could strike a single $1 trillion dollar platinum coin, and carry it (very carefully) to the Fed for deposit in the Treasury's account there.

As I wrote in a New York Times op-ed a couple of years ago, were a debt ceiling crisis actually to occur, the least awful course of action would be to follow the example of hard-up states and municipalities over the years, by announcing that the Treasury would issue scrip -- "registered warrants" -- in lieu of money to large classes of claimants. ("The Debt Ceiling's Escape Hatch," New York Times, January 9, 2013.) Recipients could include defense contractors, Medicare service providers, federal employees, and social security recipients. The scrip would not pay interest (except in certain exotic cases where required to do so by virtue of a preexisting law). Most important, the scrip would explicitly disavow that it constituted debt of the United States. Instead, the scrip's operative language would provide that it constituted an acknowledgement of a preexisting debt that the Treasury was not currently able to pay, and that it would become immediately redeemable in cash only when the Treasury was able to certify that there was enough money available in the Treasury's general fund to cover it.

The scrip strategy may sound far-fetched, but it has been used before: in fact, California relied on it as recently as 2009. Beginning in July of that year, California addressed its budget crisis by issuing 450,000 registered warrants, totaling $2.6 billion, to individual and business claimants, including recipients of aid programs, recipients of tax refunds and government contractors. Those holders who needed immediate cash were usually able to sell their registered warrants to banks at face value, though some institutions limited such purchases.

Scrip is the least bad idea for dealing with an actual debt ceiling crisis, but a far superior idea is not to have the crisis in the first place. It is fundamentally dishonorable for members of Congress to threaten to block the country from paying its acknowledged debts unless their extraneous political demands are met. "Regular order," the mantra of these marginal players, points in exactly the opposite direction. The orderly, the Constitutionally-demanded, and the moral act here is to pay the bills we have already incurred, and to use the regular order of the budget process to thrash out different points of view on how government should spend our money.

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