StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between



Debt Limit Options

04 Jul 2011
Posted by Bruce Bartlett
For more than I year, I have been warning about the danger of a debt default resulting from Congress’s failure to raise the debt limit in a timely manner. Now, we are getting close to the 11th hour and it is clear that there are many Republicans willing to risk a default to achieve their ideological goal of slashing government. Although they say they are motivated by a concern for the nation’s finances, their total unwillingness to consider so much as $1 of tax increase proves that such claims are hollow.
 
As a consequence, I continue to believe that a debt crisis is imminent. I have serious doubt that Congress will raise the debt limit in time to prevent the Treasury from running out of cash to pay its bills, including interest and repayments on the debt. And since the ultimate crisis may come during Congress’s August recess, the Treasury may have no recourse except to consider radical options for preventing default.
 
One idea comes from Peterson Institute economist Joseph Gagnon, a former Federal Reserve official. He suggested to me that the Federal Reserve could temporarily buy some of the Treasury’s $300 billion stock of gold. This would allow the Fed to create cash that the Treasury could use to pay its bills until the debt limit is increased, at which time Treasury could simply buy it back. It would be a purely paper transaction that would have no real effect on the price of gold or anything else. The Fed could simultaneously sell an equal amount of securities from its portfolio to prevent the money supply from rising more than it desires.
 
A more radical solution would be to simply disregard the debt limit altogether on constitutional grounds, an idea I suggested in the Fiscal Times on April 29. University of Baltimore law professor Garrett Epps made a similar suggestion in The Atlantic on May 4.
 
The essence of the argument involves section 4 of the Fourteenth Amendment to the Constitution, which reads: “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”
 
In my view and that of Prof. Epps, this means that the president would have constitutional authority to take extraordinary measures to protect the public credit and prevent a debt default even if it means disregarding the debt limit, which is statutory law subordinate to the Constitution.
 
Since my article appeared, I have had the opportunity to do further research on this topic and now feel even more strongly that the Fourteenth Amendment trumps the debt limit. I found strong support for this position in a law review article by George Washington University law professor Michael Abramowicz. Writing in the Tulsa Law Journal (“Beyond Balanced Budgets, Fourteenth Amendment Style,” 33:2, Winter 1997, pp. 561-612), he concludes that any government action “making uncertain whether or not a debt will be honored is unconstitutional.” As Abramowicz explains:
 
“A debt does not become valid or invalid only at the moment payment is due. A debt’s validity may be assessed at any time, and a debt is valid only if the law provides that it will be honored. Therefore, a requirement that the government not question a debt’s validity does not kick in only once the time comes for the government to make a payment on the debt. Rather, the duty not to question is a continuous one. If as a result of government actions, a debt will not be paid absent future governmental action, that debt is effectively invalid. The high level of generality recognizes that instead of referring to payment of debts, the Clause bans government action at any time that affects the validity of debt instruments…. Moreover, there is no such thing as a valid debt that will nonetheless not be honored; a debt cannot be called “valid” if existing laws will cause default on it. So as soon as Congress passes a statute that will lead to default in the absence of a change of course, the debt is invalid (or at least of questionable validity) and Congress has violated the original meaning of the Public Debt Clause.”
 
To my mind, this means that the very existence of the debt limit is unconstitutional because it calls into question the validity of the debt. So would any other provision of law. That is a key reason why Congress created a permanent appropriation for interest payments at the same time that the Fourteenth Amendment was debated. Previously, Congress had to pass annual appropriations for interest.
 
Of course, if the administration takes my position and ignores the debt limit to prevent a default on constitutional grounds, there are certainly those who would claim that it has violated the law. However, Jonathan Zasloff, a professor of law at UCLA, raises an interesting question: who would have standing enjoin the administration’s action?
 
The Justice Department would certainly not sue the president or the Treasury secretary under these circumstances, so who would? Zasloff thinks only the Congress as a whole would have standing, which means that both the House and Senate would have to pass a joint resolution condemning the president’s action and authorizing a law suit, something that would be very unlikely given Democratic control of the Senate.
 
According to a June 28 report in the Huffington Post, Democratic senators, including Chris Coons of Delaware and Patty Murray of Washington, are warming to the constitutional option for breaking the deadlock on the debt limit and preventing a default. At a press conference on Wednesday, President Obama was asked directly about this by Chuck Todd of NBC News and he refused to rule it out.
 
It goes without saying that provoking a constitutional crisis over the debt limit is a bad idea, but a debt crisis would be worse. At a minimum, the Fourteenth Amendment greatly strengthens the president’s hand in getting the debt limit increased in a timely matter. He should not be afraid to use it.
 
Addendum
 
Since I wrote this, I discovered that Prof. Abramowicz has posted an even stronger article arguing for the unconstitutionality of the debt limit. It is available at SSRN. Prof. Jack Balkin of Yale has posted a legislative history of sec. 4 that supports a broad reading of its applicability to the debt limit issue.
 

The 14th Amendment clearly

The 14th Amendment clearly prevents default on the public debt and trumps any statutes that purport to limit payment of the outstanding debt, including paying principal and interest and financing those by issuing new debt if necessary.

The harder question is all other government spending. Appropriations may be an obligation, but it's difficult to argue they are public debt for purposes of the 14th Amendment.

That does not mean all other government spending must stop. There are two sets of laws that are in conflict, appropriations and the debt ceiling. The govt can not comply with both. The president may therefore comply with the appropriations, doing all things necessary to raise the money, including issuing debt, so long as no more is spent than existing mandatory appropriations and so long as the public debt has priority.

It might be argued that the president was violating the law by spending and issuing debt, but to fail to do so would also violate the law. Given that any course violates the law, the president may do the right thing. He is obligated under the constitution to take care that laws are faithfully executed. In this case, he will have to use his best judgment as to which laws must be followed. Again, in the face of contradictory statutes, he must violate some law and comply with other. Absent statutory guidance, there is no alternative.

Other solutions include raising money from the Fed. Lend gold. Strike at $1 trillion coin and sell it to the Fed. Ask the Fed to tear up the treasury bonds it holds. Given the chaos that would result from a default or the cessation of govt spending, the Fed is obligated under its dual mandate to help the treasury continue making payments.


I think foosion has the more useful argument

The 14th Amendment protects holders of Treasuries, and (depending on how you interpreted it) some other categories, including businesses with accounts receivable from the government, and people with federal pensions. That still leaves plenty of room for cutting vital services and contracting the economy by cutting government spending.

In contrast, foosion's analysis clearly gives Obama's the upper hand. He is being given conflicting directives by Congress, which lets him choose which ones to follow. This means that Obama can just continue to follow the spending directives of Congress as though the debt ceiling weren't there. Or he could stick a bit closer to the debt ceiling by cutting some programs that Republicans want. If Obama has reached to point where he is willing to play hardball with Republicans, the approach described by foosion gives him the means to do it.


I wonder if Obama could find

I wonder if Obama could find a constitutional justification for refusing to pay Congress's salaries while maintaining all other forms of spending. (For bipartisanship, he could decline to pay his own salary as well. Conveniently, Obama is already a millionaire. Many members of Congress aren't in nearly such good financial shape.)


Debt Limit

Bruce:

I share with you your belief that there will be no debt limit agreement by the due date unless Obama (and this is not impossible!) makes excessive concessions to the rethuglicans.

As you note, the tea nuts have no desire to address debt issues, merely an ill-informed and anarchistic desire to bring the house down, consequences be damned.

Therefore:

Option 1 (gold purchase) merely defers the day of reckoning, and in fact maintains the illusion (delusion) that the debt limit issue is inconsequential.

Option 1 (14th amendment) though no doubt on firm ground legally is too subtle for the country as a whole and the tea nuts in particular. this will merely allow the rethugs to further damn Obama as an anti-constitutionalist (to go along with his socialist marxist europeanist kenyanist not-very-white-ist tendencies). It may solve the problem in a mechanistic way, but will further embolden the loony party.

It is time for Obama to take a stand, dare the rethugs to bring the govt to a halt and make clear that they own the consequences. Tough medicine for the country (and the global economy?) but how else is the US going to awaken from this nightmare of anarchistic fecklessness from one of the two major parties?


You don't get it. We aren't

You don't get it. We aren't talking about "shutting the government down" a la the budget fight earlier this year. We're talking about defaulting on our debt. Or more specifically, defaulting on the safest investment in the world, owned by risk-averse investors the world over. The consequences of this would be far, far more dire than a government shutdown. And just for icing on the cake, the interest rates would go through the roof, costing the government hundreds of billions in the long run. It's a bad idea.


I understand your point.

I understand your point. however, the alternative appears to be the continuing governance by lunacy. I believe it is more important to break the hold of the loonies over the US Govt


continuing governance by lunacy

.. that lunacy has been "continuing" for decades. To expect it to be solved in one swoop is equal lunacy.


What then?

So if Obama ignores the debt ceiling, what then? It seems like it would let the GOP off the hook. They could keep their principles, complain about Obama, not have the economy collapse and eat cake.

However, there is still the budget. How would Obama stiffing Congress on the Debt Ceiling affect budget negotiations?

The policies that the Dems and the GOP would pursue cannot be reconciled. Splitting the difference will not give us good, coherent, fiscal policy.

Why is Congress not worried about unemployment? In November of 2012, the army of the unemployed will punish all incumbents.


Re "What Then"

You can be sure that the house of reps is worried about unemployment. Their worst case scenario is a drop in unemployment, which is why they are holding the line so rigorously against anything that could potentially improve the situation......


More Questions

Hi, again Bruce, this post brings more questions. I've been reading that book "The Great Treasury Raid," since you mentioned it in that Forbes article. In that article you mentioned how Kennedy sent a letter to congress telling them to close certain loopholes alongside his big tax cut. Of course, this was ignored. By 1979 the effective tax rate for the top 1% was 37% (see source here http://lanekenworthy.net/2008/01/14/taxes-at-the-top/), and went down to about 25% in 1981. When the 1981 tax cut was put together, were Kennedy's loophole requests known about and factored into the bill (were some outlets closed), or were the same flaws that the '64 bill had in it in the '81 bill too? If they were in there, was there a reason for doing so, and why would it have helped?

By the way, a comment on your previous post said the following: Congress consistently approved less spending that Reagan requested in his budget proposals. So the notion that Reagan was suckered into agreeing to the 1982 tax increases based on the idea that spending would be cut is ridiculous. Spending *was* cut below the level Reagan wanted.

This runs contrary to what you said in your book: Is he right or wrong? If you are right, could you verify it with a source other than Reagan (always good to rely on a neutral party)? If not, could you point me in the direction of somewhere that I could verify it for myself? I'm not calling you a liar, I'm just confused about all of this and wish to learn. Thank you.

Thanks.

P.S. Why didn't Reagan ever raise taxes enough to fully close his deficits?

Thanks again.


Reagan took back

50% of the 1981 tax cut with tax increases. 


Thanks for the reply

Thanks for answering, but I don't think that it sufficiently answers my questions. For instance, if Reagan raised taxes so much, why didn't he just go ahead and raise them enough to get rid of the deficit? I understand that in '82 to about '84-'85, he needed to keep some cuts to let the tax cut work. But why didn't he just close off the deficit entirely. He raised them in '86, why not go all the way then or in 87-88? Also that other comment I mentioned said that Congress gave Reagan less spending than he wanted, is that true?

Thanks again, hope to hear from you. I apologize for seeming so annoying and persistent. You are just someone I respect and admire, and I think the world of what you have to say.


Tea Party Respects Constituton, so this is easy!

All that needs to happen is to have Biden or Pelosi read the pertinent section of the 14th to Eric Cantor, he can do an Emily Litella, and we can move on.


Tea Party = GOP front

Are you kidding about the Tea Party respecting the Constitution? It is nothing more than a GOP front, much in parallel with Communist front groups that served the Soviet Union by claiming to be "Mothers for Peace" or "Students for Justice" (I have made up those names) that pretended to be spontaneous movements here but followed the Soviet line closely. The Tea Party, dupes for Karl Rove (whose methods are much like a Commie apparatchik) and his ilk, prefers ruin of the American economy to the re-election of President Obama.

Besides, these Tea Party types call themselves "10th Amendment citizens", somehow conveniently ignoring the 13th, 14th, and 15th Amendments.

The President has a selling job to do, but if anyone can sell it, he can. That's what we get with a "Professor of Constitutional Law" as President instead of some hollow demagogue.


"To my mind, this means that

"To my mind, this means that the very existence of the debt limit is unconstitutional because it calls into question the validity of the debt."

I think you are referring to this part:

"The high level of generality recognizes that instead of referring to payment of debts, the Clause bans government action at any time that affects the validity of debt instruments…. Moreover, there is no such thing as a valid debt that will nonetheless not be honored; a debt cannot be called “valid” if existing laws will cause default on it."

Which basically means that the public debt is a senior claim on all revenues that the federal government takes in. Meaning that any tax law or government expenditure authorized by Congress that attempts to abrogate the rights of bondholders is unconstitutional.

This also means that the U. S. Treasury has the right to decide which payments to make (debt service payments) and which not to make (government payrolls).

There is absolutely no mention of the debt limit in the paragraph that you reference. The only thing the 14th amendment dictates is that debt service payments take precedent over all other federal policies (taxes and expenditures).


Bruce, You once again make

Bruce,

You once again make an assertion that you haven't substantiated in the slightest, even to offer any substantive refutation of apparently strong arguments to the contrary.

As in previous posts of yours, assert that failure to raise the debt limit, presumably within some time frame you have in mind, is likely to result in default on Treasury debt. You write above:

I have serious doubt that Congress will raise the debt limit in time to prevent the Treasury from running out of cash to pay its bills, including interest and repayments on the debt.

You never did provide any substantive refutation of the point made here based on data published by The Economist http://capitalgainsandgames.com/blog/bruce-bartlett/2194/dopiest-constit...

All you did was offer up a very weak, vague response that Treasury finances vary day-to-day, and provide a link to data in reports in a form that was almost completely unusuable to fact-check your claim unless one were to spend countless hours pulling a couple of data points individually from a large number of separate reports.

Given that you persist with this assertion, one would hope you are basing it on some actual data that you can offer your readers. So where is your data?? As anyone can see at the Economist links at the comment to which I link above, on a monthly basis revenues far, far exceed interest payments (which are all that we must expend to avoid default on Treasuries, since principal can be rolled over). You say (or at least strongly imply) that even if these interest payments are our top priority, the Treasury is likely to have insufficient funds to consistently make them, due to daily fluctuations in revenue. Well -- I ask again, where is your data to support your assertion?? Can't you at least link to or post daily revenue and interest expense data that support your assertion, if you actually have such support for your assertion (as opposed to just, well, implying something without any real basis)? Even if there are any occasional days when interest expense exceeded revenue, there would still be the question of whether or not the Treasury would really be forced to live day-to-day, as opposed to parking the vast surplus (of revenues over interest expense) that it would have on almost every other day, but at least it would be a start if you could at least offer that much, which is to say offer something, anything that backs up your assertion.


Good Point

Yep, once again, here’s the link and the money quote from that Economist article:

“The helpful table below from Lou Crandall of Wrightson ICAP shows that in every month this year, projected cash receipts comfortably exceed interest payments; the narrowest margin comes in November, when receipts exceed interest by $131 billion.”

http://www.economist.com/blogs/freeexchange/2011/01/americas_debt

That table reflected projected revenue receipts to interest expense payments for each month in 2011.

Earlier Bartlett wrote in response to this challenge:

“You have to remember that the Treasury's cash flow is not constant. There are quarterly bulges followed by months of negative cash flow. There is no assurance that on any given day it will have the cash to redeem maturing notes, bonds and bills and also have the cash to pay interest. If payments are not made in a timely manner then a default occurs. But Treasury is also required by law to make Social Security payments exactly on schedule. In theory this is not a problem so long as there are enough Treasury securities in the trust fund. But to pay the benefits, Treasury can't send people bonds; those bonds have to be converted to cash.”

$131 billion in the worst month strikes me as a pretty good cushion and more (much more) than enough to also repay sufficient funds to Social Security to enable it to be current on those SS payments (assuming they are “legal obligations” in the first place). With respect to the supposed problem about “redeeming maturing notes”, Bartlett seems to forget that Treasury can make new issuances to satisfy any redemptions. If you redeem $100 of outstanding debt and simultaneously issue $100, the debt limit is not exceeded. The only issue is interest on the debt. If Treasury could not plan for or work around any daily anomaly (which is exceedingly highly unlikely to begin with) we need a new team.


The Treasury

considers all payments it must make to be debts that are owed. The reference to pensions in sec. 4 makes clear that those who wrote it had a broader view of the government's indebtedness than just U.S. Treasury securities.


Bruce, With all due respect,

Bruce,

With all due respect, you still seem to be playing games, making vague implications (and often irrelevant at that) rather than stating a clear, relevant response, let alone providing support for what you seem to be implying. I’ll try yet again to get the latter from you. If my questions seem tedious, it’s only because it seems you are being slippery, evasive, and vague about what you are asserting, and because you offer no support for what you seem to be implying. I’m hoping you’ll make more of a good-faith effort to give clear, direct, relevant answers than some politician on a Sunday morning talk show trying to run out the clock without giving a clear answer.

If the debt ceiling is not raised:

1. Are you saying that there would likely be some day in the near future for which that day's expenditures for interest on Treasuries will exceed that day's revenue. If so, presumably you are basing that assumption on data. Can you please provide such supporting data, if it actually exists?

2. If you are asserting #1, are you also asserting that, over the days and months prior to that day in #1 above, during which there would be massive surpluses at that level of expenditures, the Treasury were not able to retain those surpluses in liquid form (as opposed to buying back Treasury bonds) to cover a shortfall such as on that day in #1.

3. Are you asserting neither #1 nor #2, but rather (A) that the Treasury could not prioritize payment of interest on Treasuries over making full Social Security payments, AND (B) that #1 and #2 WOULD apply if we are talking about not only interest payments on Treasuries but also full Social Security payments (i.e., that those combined expenditures are likely to exceed revenues on some day soon, AND the Treasury would have no way of saving the huge surpluses on other days to cover such a shortfall on some relatively rare day(s)) ? If so, presumably you are basing that assumption on data. Can you please provide such supporting data, if it actually exists?

4. Are you asserting none of the above, but only asserting the equivalent of #1 and #2 if we are talking not just about expenditures for interest on Treasuries and Social Security, but rather “all payments it must make” – i.e., are you asserting that revenues on some day in the near future are likely to fall short of “all payments [the Treasury] must make”, and that the Treasury would not be able to save surpluses on other days to cover such shortfalls on those days? If that’s what you are (now) asserting that you mean:

a. What are you including in “all payments [the Treasury] must make”?

b. Are you saying that failure to make timely payments on all that you are including would constitute what you call Treasury “default”? If so, are you saying the impact on markets and the adverse economic consequences of failing to make any of those payments would be in the same ballpark as failure to make interest payments on Treasuries (while rolling over principal) ? If you are not saying that, then what’s the point of lumping all of that together as if such an expansive definition of “default” is relevant to a discussion that obviously relates to the (supposed) prospect of default on Treasuries?

c. Presumably you are basing that assumption on data. Can you please provide such supporting data?


Do Your Own Work

In my experience, accusing someone of dealing in bad faith almost never results in a positive response. When coupled with sneering about being "slippery" and "irrelevant," I would say you pretty much accomplished an own goal.

If the data means that much to you, do your own research. Who knows, you might learn something.


nyambol, Bruce Bartlett has

nyambol,

Bruce Bartlett has repeatedly implied that failing to raise the debt ceiling (presumably within some time frame he has in mind) will likely result in default with associated grave consequences. I've asked him on at least one prior thread as well as this one to clarify what he is actually asserting and to provide the data upon which he is supposedly basing that assertion. On that thread and again on this one he has responded in ways that are indeed fair to describe at least as not substantively responsive and in several cases making further implications that do come across as evasions of my requests/questions.

I've presented data to him via links, repeatedly. He has implied that he is basing his view on more relevant data. I've asked him to simply to clarify his point and provide those supposedly supporting data in some way. To date he has done nothing of the sort.

While it may be that in some cases, particularly at early points in a discussion, accusing someone of bad faith is not conducive to getting a real response (as opposed to continued apparent evasions via opacity/vagueness, straw men, irrelevancies, etc.), at some point it's not out of line (and I'd say indeed useful in public discourse) to call a spade a spade when someone (particularly someone with a very public voice who is speaking on a very important public policy issue) does not appear to be engaging in good faith.


It's About Public Debt

So, if I were to accept your argument (and putatively that of the Treasury, though I doubt this is their position) social security is a “public debt” that can never be repudiated or changed by Congress by virtue of Article 14(4). That’s a pretty far-fetched idea. In fact, the Social Security administration has just stopped sending out benefits statements to future retirees under the rationale that they are saving “mailing costs” (that might save them money but this rationale is exposed by the fact that the ability to get the same information via internet has also been stopped). The very purpose of this then seems to be that they are preparing for Congress to repudiate at least a portion of that purported “public debt”.

Possibly the most extensive study of the issue was done by Professor Abramowicz of GW University Law School : “Train Wrecks, Budget Deficits, and the Entitlements Explosion: Exploring the Implications of the Fourteenth Amendment's Public Debt Clause”.

In that article he comes down pretty heavily in favor of the conclusion that entitlements like social security (and more obviously Medicare) do not constitute “public debt” within the meaning of the 14th Amendment:

“Part I’s broad construction of what constitutes the “public debt”
gives encouragement to those who oppose cuts in Social Security and other
entitlement spending. After all, Social Security is a social contract providing
for insurance payments to be made in exchange for beneficiaries’ earlier
contributions.199 In essence, with Social Security and Medicare, the United
States has accumulated an “implicit pension debt”200 that the Constitution
protects.

Or so the argument goes. But there are reasons--textual,
jurisprudential, and practical--that protecting entitlements with the Public
Debt Clause begins to stretch the Clause’s meaning. First, the social contract
that Social Security embodies might not trigger the Clause, because the
government has not entered into written agreements with beneficiaries.”

The article goes on to list three other reasons for this conclusion, including the fact that the Supreme Court held in Flemming v. Nestor that Congress could retroactively deny benefits for aliens deported for Communist activities.

A lot of other government spending has much less a claim to the protection of Article 14(4) than social security or medicare.


Social Security is a Trust Fund

Social Security is a fully-funded trust fund. However, Congress has for more than 25 years been borrowing the fund surpluses. The Treasury is required to reimburse the fund each year for the amount of borrowed money that the fund will require to meet its obligations.

This is why SS appears as a budgetary line item. Paying that money is an obligation like any other.


Really?

Whether Social Security s "fully funded" depends, I guess, on whether one uses the cash or accrual method of accounting. If the latter, which is required for pension funds of private industry, and for good reason, social security is woefully underfunded by the tune of several trillion.

But, that's largely beside the point. If I were to accept the proposition that debt from one branch of government to another is fully protected under Art 14(4), which is a very dubious proposition, the most this would mean is that general revenues would need to be repaid to the extent that the current revenues from payroll taxes to fund current benefits are insufficient. Were it not for the recent payroll tax cut, that number would be about $30 billion for 2011. With that cut, it's about $131 billion for 2011. If you want to put that in par with outstanding Treasury debt, I would be happy to do so for the sake of argument. There's still a lot left over in the federal budget other than servicing the interest on Treasury debt and the IOU's to social security.

BTW, speaking of inter-governmental debt, a good portion of that debt that needs to be serviced is paid to the Federal Reserve. The unlikely bedfellows Ron Paul and Dean Baker have suggested one solution might be to just start burning that Treasury paper held by the Fed. Even absent that, I wonder, would Art 14(4) be violated if the Treasury didn't pay the Fed on time? It seems a rather strange idea that the government could default on a payment to itself.

This whole 14th Amendment business is rather tedious and irrelevant. Even the White House seems to have given up on it, as reported by Bloomberg and others last night:

"Despite suggestions to the contrary, the 14th Amendment is not a failsafe that would allow the government to avoid defaulting on its obligations," said White House spokeswoman Amy Brundage.


Oh, and another point. If

Oh, and another point. If this very expansive view of the scope of Art 14(4) is that the "promises" made to current and future social security recipients cannot be broken because they constitute "public debt' "the validity of which cannot be questioned", why then is the administration now conceding that social security is now "on the table"? It seems to me that according to the expansive view theorists, these "promises", once made, are constitutionally protected and can never be taken back by Congress or the President. I mentioned earlier that the Social Security Administration has stopped sending out benefits statements (and has taken down their online service). This was announced in April. It seems to me that social security has been on the table for some time now even before the bogus 14th Amendment meme gained momentum as a political tactic. The inconsistent application of these theories is rather obvious.


Bruce, Tim Geithner is one clueless individual...

"The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void."

This DOES NOT say that payment for pensions shall not be questioned. It says that debts incurred for payment of pensions shall not be questioned. Please buy some reading glasses for the Treasury department.

Here is another one of his brain storms from the letter he sent to Congress...

"Prioritization also fails to account for how payments on principal would be made if investors were to lose confidence in U.S. creditworthiness. In August of this year, for example, more than $500 billion in U.S. Treasury debt will mature. Under normal circumstances, investors who hold Treasuries purchase new Treasury securities when the debt matures, permitting the United States to pay the principal on this maturing debt."

"If investors chose not to purchase a sufficient volume of new Treasury securities, the United States would be required to pay the principal on maturing debt, and not merely the interest, out of available cash. Yet the Treasury would be unable to make these principal payments without the continued confidence of market participants willing to buy new Treasury securities. Your proposal assumes markets would be unconcerned by our failure to pay other obligations. But if this assumption proved incorrect, then the United States would be forced to default on its debt."

First, there has never, ever been a single failed bond auction in the United States. Second, private investors will be happy to purchase the debt of the federal government for the right price. Third, many of the major banks in the United States (and some large foreign banks) are preferred vendors for U. S. Treasury debt - this has its benefits (they get first dibs on new Treasury marketable issues) and its requirements (they are REQUIRED to submit bids for new issuance). Fourth, the federal reserve is still out there.


All Creditors are Equal, but Some Are More Equal Than Others?

The anti-sky-is-falling argument seems to rest heavily on the presumption that only U.S. government securities (and possibly Social Security benefits) qualify as public debt, ergo the Treasury can elect to pay the latter and at least the interest on the former, while stiff arming everyone else.

To my admittedly non-expert ears, this sounds rather naive, given that receivables and back pay are both legitimate creditor claims (certainly the bankruptcy courts think so.)

Don't know what percentage of federal appropriated spending those two categories would cover -- or whether breaking an existing contract by unilaterally cancelling a scheduled purchase of goods or services would also constitute default.

But what I know or think doesn't matter. What matters is what the rating agencies think, and how they would react to any scheme that prioritizes payment of claims against the US Treasury.

Would that result in Uncle Sam being slapped with an "issuer default" -- even if the AAA rating on outstanding (and presumably still interest-paying) securities was left intact? And how would the markets react to that?

Damnfino. But I have yet to see any statements by any of the rating agencies on this question -- or even any analysis by the usual analyzers. Which seems odd, to say the least.


Peter, Indeed, what matters

Peter,

Indeed, what matters are consequences, not labels. But here's how some seem to be playing the label game:

The starting point for discussion of this whole issue was fairly universal agreement that failing to make timely payments on interest on publicly-held Treauries (while rolling over principle, in effect) -- i.e., default on publicly-held Treasuries -- would likely lead markets to demand higher interest rates on Treasuries, with associated negative economic effects.

But some then started arguing that failure by the Treasury to make timely payments for other things would also meet some definition of "default". The implication -- what they want people to read into what may be little/nothing more than a semantic point they are making -- is that all those awful consequences we rightly fear in a scenario of default on publicly-held Treasuries are also the consequences (or similar to the consequences) of failure to may those other sorts of payments.

But they only sneak in that implication; they don't make the assertion explicitly, because then they'd have to support that assertion in some way. They'd have to answer the types of questions you pose in your comment: What WOULD likely happen if we failed to make timely payments on some sorts of payments, while still making interest payments on publicly-held Treasuries.

And perhaps some on the other "side" would like to just ignore the question too and imply that nothing short of default on publicly-held Treasuries would generate higher interest rates for Treasuries or in the private sector.

I don't know the answers to your questions either, and I agree that too small a portion of discussion of this issue has been devoted to addressing such questions. Perhaps it doesn't play as well in the hyperpartisan food fight.


I'm Confused

Are the people who complain about Mr. Bartlett's supposed lack of facts arguing that because the Treasury would have enough cash to cover interest payments there isn't really a problem? Would this not require stopping the payments for many other government obligations such as social security checks and payments to contractors for services already rendered?It is my understanding that the federal government borrows 40 cents of every dollar it spends. Even if one believes the federal government should be smaller, it seems obvious that trying to shrink it by 40 percent overnight is a bad idea. Trying to slow a car down by smashing it into tree may have the desired result, but the passengers probably aren't going to come out in great shape.


Re: Are the people who

Re: Are the people who complain about Mr. Bartlett's supposed lack of facts arguing that because the Treasury would have enough cash to cover interest payments there isn't really a problem?

No, there's no basis in what Vivian and I have said for you to think that we have implied that there wouldn't be a problem. I'm just pressing Bruce to clarify what he means and provide support for his assertion.

Although I'm not an economist, I agree with you (and I've said this elsewhere in the blogosphere previously) that I assume that a sudden withdrawal of spending equivalent to several percentage points of GDP would probably be disastrous if it went on for long. I think it would drive us into deep recession.


I'll Second That

My posts have nothing to do with whether raising the debt limit is a good or bad idea. Of course, raising it is inevitable and failing to do so in a timely manner will likely have adverse consequences and severe ones at that as mentioned by Brooks. But, failure to deal with the medium and long-term deficit in a timely manner will have equally if not even worse consequences.

The fact is that Bartlett raised a strictly legal issue--or issues--among which was his assertion that failure to raise the debt limit would inevitably and unavoidably, even in the short term, cause the United States to default on its debt obligations in violation of Article 14(4). He raised and framed the issue, not me. Given his lack of responsiveness, I'm beginning to think he's sorry he even raised the subject.


Get spending down to an

Get spending down to an actual sustainable level in DC - say 21% of GDP which is the absolute cyclical maximum that tax revenues have ever reached - since WW2 - regardless of "tax rates". Then - and only then - will the government have earned enough credibility on the spending side of the table to talk about reforming taxes in a fair way. Until then, the federal government is a thief and no one should trust it at all. New revenues will simply used to bailout the richest counties in the US (those surrounding DC) via vigorish or to, once again, bail out the richest employees in the US (those on Wall Street).

“Then I say, the earth belongs to each of these generations during its course, fully and in its own right. The second generation receives it clear of the debts and incumbrances of the first, the third of the second, and so on. For if the first could charge it with a debt, then the earth would belong to the dead and not to the living generation. Then, no generation can contract debts greater than may be paid during the course of its own existence. Thomas Jefferson

I am not among those who fear the people. They, and not the rich, are our dependence for continued freedom. And to preserve their independence, we must not let our rulers load us with perpetual debt. We must make our election between economy and liberty, or profusion and servitude. If we run into such debts, as that we must be taxed in our meat and in our drink, in our necessaries and our comforts, in our labors and our amusements, for our callings and our creeds, as the people of England are, our people, like them, must come to labor sixteen hours in the twenty-four, give the earnings of fifteen of these to the government for their debts and daily expenses; and the sixteenth being insufficient to afford us bread, we must live, as they now do, on oatmeal and potatoes....And this is the tendency of all human governments. A departure from principle in one instance becomes a precedent for a second; that second for a third; and so on, till the bulk of the society is reduced to be mere automatons of misery, and to have no sensibilities left but for sinning and suffering. Then begins, indeed, the bellum omnium in omnia, which some philosophers observing to be so general in this world, have mistaken it for the natural, instead of the abusive state of man. And the fore horse of this frightful team is public debt. Taxation follows that, and in its train wretchedness and oppression. -- Thomas Jefferson

I too have been a close observer of the doings of the Bank of the United States. I have had men watching you for a long time, and am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the Bank. You tell me that if I take the deposits from the Bank and annul its charter I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves. I have determined to rout you out and, by the Eternal, (bringing his fist down on the table) I will rout you out. - Andrew Jackson

Neither slavery nor involuntary servitude, except as a punishment for crime whereof the party shall have been duly convicted, shall exist within the United States, or any place subject to their jurisdiction. - 13th Amendment

Debt default, in some form - via monetary debasement or via forcing the next generation into involuntary servitude in order to pay perpetual interest on this generations debts - is inevitable. I - like Andrew Jackson and Thomas Jefferson - would rather that this generation incur the consequences of our own generational incompetence, than leave this millstone as our "legacy" to the next generation.


Question: Who has standing to sue?

Answer: The House of Representatives.

They can simply vote to impeach the President for violating Article I, Section 7 of the Constitution which says that "all bills for raising revenue shall originate in the House of Representatives."

Crazy? Sure. Impossible? Hardly.


"all bills for raising

"all bills for raising revenue shall originate in the House of Representatives."
Title 31 is your friend, embrace it. Or don't, but every word was passed by Congress and signed into law.

The Secretary of the Treasury shall...
(3) issue warrants for money drawn on the Treasury consistent with appropriations;
(4) mint coins, engrave and print currency and security documents,
31 USC 231

Miscellaneous permanent appropriations
Necessary amounts are appropriated for the following...
(2) to pay interest on the public debt under laws authorizing payment
31 USC 1305

The Secretary of the Treasury may borrow on the credit of the
United States Government amounts necessary for expenditures
authorized by law and may buy, redeem, and make refunds under
section 3111 of this title.
31 USC 3004(a)

(h) The coins issued under this title shall be legal tender...
(k) The Secretary may mint and issue platinum bullion coins and
proof platinum coins in accordance with such specifications,
designs, varieties, quantities, denominations, and inscriptions as
the Secretary, in the Secretary's discretion, may prescribe from
time to time.
31 USC 5112


Given this, how is it not the

Given this, how is it not the case that the House is therefore responsible for the US violating the debt limit? The House passed the spending bills that push the US over the limit.

This responsibility is directly in the lap of the Tea Party and the Republicans.


Debt Debate

I think we need to define our terms.

Government has certain essential, constitutional functions.

Those functions have not changed.

Logically, what it costs to perform those functions would be driven by the size of the population for whom they are performed, and inflation.

NOT GDP.

For example - if a local government provides schools, the cost to provide teachers would be a function of the number of students and inflation - - that GDP grew faster than the population because the pupils' parents increased their productivity would have nothing to do with it. The same argument holds for garbage collection, road and bridge construction - any function.

There is simply no logical tie in to any "percentage of GDP." It just so happens that, historically, revenue has more or less grown with GDP, because we have an income tax. And it so happens that, historically, GDP growth has well outpaced the growth of the population and inflation, because we have a more or less market-based economy.

But that was gravy. That was cushion - an immense amount of cushion - built into the system. The government is not entitled to a share of GDP and there is no logical reason why it should, or has to, spend a share of GDP. Federal spending growth should, at least during peacetime, not exceed the combined rate of population growth and inflation. Historical revenue growth typically exceeding the combined rate of population growth and inflation should have been used to pay down debts incurred during wartime and then set up a rainy day fund - and beyond that, should have been returned to the taxpayers.

But it wasn't. The government spent it. They spent it inefficiently performing the functions that it was set up to perform, and they spent it on a whole host of items that it was not set up to perform. And each year's spending built upon the last, and budgets were based on the assumption that revenue would and must continue to outpace population growth and inflation, and over time it became accepted that the government was entitled to receive a certain percentage of GDP - and to spend an even higher percentage of GDP.

No - re-stating the numbers as percentages of GDP is at worst an attempt to mislead people into believing that there is a "revenue shortfall" and at best an attempt by government to mislead itself, much like an alcoholic or obese person who "cuts back" from four beers a night to three convinces himself that he is in control.

Certainly the government has lived up to the "beast" part of "starve the beast" - but it is hardly starving - - it got up and went back to the buffet table for seconds. The uninformed and the ideologues claim to clamor for the "tax rates we had under Eisenhower, who refused to cut tax rates and balanced the budget." But they are ignorant of, or conveniently leave out, the fact that after and ever since the 1950s, revenue went UP - spending simply went up faster.

In every decade since the 1950s, federal revenue growth has outpaced the combined rates of population growth and inflation. We ran deficits, and have run up a $14 trillion debt, because the government spent that increase and then spent more.

This is not in any way shape or form a matter of "revenue not keeping up" with the cost to perform basic functions. It is a matter of the tendency of organizations to self-perpetuate, to grow, until some outside force stops it.

We have a problem. Spending. Republican spending and Democrat spending. The question is not "revenue versus cuts" - it ought to be "which cuts." It ought to be the question of whether one tragedy that was avoidable with the systems then in place - some jerk hijacking planes and crashing them into buildings - justifies trillions of dollars in "homeland defense" spending. It ought to be whether we need to have Cold War era military bases. It ought to be whether we should be engaged in conflicts in the Middle East where we are not wanted. It ought to be whether we should have bailed out corporate America. We do not need agricultural subsidies - or any subsidies. We don't HAVE to make "draconian cuts to benefit programs" - take food from the mouths of babes. And it is not a dichotomy between "the Bush tax cuts" and feeding the hungry - - the highest annual federal tax revenue, adjusted for inflation and population growth, was 2007, followed by 2006.

Revenue is not the problem and has never been the problem. As long as the MSNBC crowd pretends that it is, you are diverting attention away from the real problem: that spending on what is worthwhile is being crowded out not by "tax cuts" but by spending on what is not worthwhile.


I'm with you on a lot of

I'm with you on a lot of this, but revenue really is down right now, which is exacerbating the problem. But sure, spending is the more problematic side of the equation, and I'm right with you on the things you list that ought to be cut back. A 3-to-1 deal (3 parts cuts, 1 part revenue increases) is a perfectly reasonable response. I say that not because I want tax increases (who does, really?), but rather because we've racked up a big credit card bill and we need to pay it down. It sucks, but that's the situation. No free lunch and all that.


Is the constitutionality of the debt limit crucial?

In the debt limit statute, did congress give itself sole and exclusive power to determine the debt ceiling?

I've read other articles suggesting that Obama could unilaterally cut spending or raise taxes.
But these powers are constitutionally reserved, solely, for the House and congress, respectively.

If determination of the debt limit ceiling were not an exclusive power of congress, a president (doubtful Obama) could unilaterally raise the ceiling, as preferred.


Just keep spending...

Given Tribe's pretty good take on problems with the 14th Amendment angle, how about this:

http://neweconomicperspectives.blogspot.com/2011/07/qe3-treasury-stylego...

Congress has authorized, actually mandated, the spending.

Treasury is empowered to mint money.

What's the problem>


Bodily Fluids

There is good reason the GOP doesn't want to raise the debt limit: They're protecting our precious bodily fluids from the Russkies.

Seriusly, isn't there something positively Strangelovian about the GOP's willingness to let the economy collapse that a new pure Laissez Faire economy might rise, Phoenix like, from the ashes of te old?




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