Debt Ceiling Options

As Congress and the President continue to wrangle over raising the debt ceiling, more of us are wondering, what would happen if the debt ceiling isn’t raised? To paraphrase Sherlock Holmes, when you have eliminated the impossible, whatever remains, however improbable, must be Plan A.

Let me begin with Bruce Bartlett’s fine summary of the core issue:

The debt ceiling is a cap on the amount of securities the Treasury can issue, something it does to raise money to pay for government expenses. These expenses, and the deficit they’ve wrought, are a result of past actions by Congress to create entitlement programs, make appropriations and cut taxes. In that sense, raising the debt limit is about paying for past expenses, not controlling future ones. For Congress to refuse to let Treasury raise the cash to pay the bills that Congress itself has run up simply makes no sense.

Some observers are suggesting that the debt ceiling itself is unconstitutional. However, Laurence Tribe raises doubts about that legal theory. Perhaps a sounder legal basis for the President to simply ignore the debt ceiling has been discussed in the Washington Post:

Larry Rosenthal, a professor at Chapman University School of Law, said … a more persuasive argument is that the agreement in April to fund the government through the remainder of the 2011 fiscal year implicitly increased the debt ceiling. By passing that agreement, Congress essentially instructed Obama to spend money in the coming months. To pay for programs Congress authorized, the government will have to borrow money.

“It’s basically an order to the executive– pay this money,” Rosenthal said. Even if the debt ceiling would block him from doing so, “when two laws are in conflict, the more recent law is understood to supercede the first law.”

A separate question is whether it would be logistically feasible for the federal government to suddenly stop the payments that it is institutionally accustomed to make. Felix Salmon explains:

purely as a practical matter, it’s far from clear that it’s even possible to stop making the 3 million payments that Treasury makes automatically every day. Doing so involves a massive computer-reprogramming effort which I’m sure could not be implemented overnight– and for political reasons nobody is going to get started on such an effort until after all hope is lost for a deal in Congress.

Realistically, then, the government is likely to breach the current debt ceiling no matter what Congress agrees. A failure to lift it would be a bit like an edict to a steaming supertanker that it had to stop dead: no matter how much force of law that edict has, sheer momentum is going force many basic operations of the public fisc to continue for some period of days or weeks.

At that point– and no earlier– there would be enormous pressure on the White House to pull out the 14th Amendment and declare the debt ceiling unconstitutional, if only for practical reasons: doing so would be a lot easier than trying to reprogram the computers which are set to send out $49 billion of Social Security checks on August 3. Not to mention that no president ever wants to be the person who stiffed America’s seniors on their guaranteed monthly income: a greater failure of leadership can hardly be imagined. On the other hand, saying “enough of you bickering legislators, I’m sworn to uphold the Constitution and do what’s in the best interest of the country” is much more presidential.

There are other possible accounting steps, such as delaying payments and paying with IOU’s, that the Treasury could consider. But here’s what Treasury Secretary Timothy Geithner said in May:

our plan is for Congress to pass the debt limit. Our fallback plan is for Congress to pass the debt limit, and our fallback to the fallback plan is for Congress to pass the debt limit.

Please permit me to humbly suggest the following fallblack3 plan. I recommend that President Obama should be prepared to give the following speech on August 3:

Fellow Americans. Along with the other major developed economies, the United States faces enormous challenges in restoring economic growth and getting our citizens back to work. More than ever, Americans expect our elected representatives to work together to address these problems.

But Congress has been unable to reach agreement on even the most basic measures needed to keep the U.S. government functioning. As of today, the Treasury faces an untenable situation. The Congress has instructed us to maintain a level of expenditures on a broad range of functions. Current tax receipts are insufficient to cover those expenditures. That means that in order to carry out the fiscal plan that Congress has already passed into law, the Treasury would need to borrow additional funds. But Congress has also failed to approve authority to conduct that borrowing.

It is not clear what Congress is instructing me as president to do. Am I supposed to order Social Security payments to our retired citizens to be stopped? Congress has said no, those payments are supposed to be made. Am I supposed to stop paying the salaries for our troops risking their lives to protect us even at this moment as the politicians wrangle? Congress has said no, those payments are to be made. Am I supposed to fail to meet principal or interest payments on existing U.S. debt? The Constitution itself explicitly forbids this.

Anything I instruct the Treasury to do at this point would be in potential conflict with existing legislation, for the simple reason that existing legislation is self-contradicting. I have therefore made a decision that, until instructed otherwise by the Congress, Social Security checks will continue to be sent on time. Soldiers and their families are going to receive the funds that Congress has already authorized. And U.S. debts will always be honored. And I will make sure all this happens by authorizing the Treasury to borrow the funds necessary to implement existing legislation.

It is my hope and expectation that this will only be a temporary arrangement, until Congress can agree on spending, tax, and borrowing legislation that is not self-contradictory. I have faith that, despite our real disagreements, Republicans and Democrats can work together on a plan that is best for our country. But as long as I am President, I am not going to allow political bickering and gridlock to plunge us into even deeper problems than we already face.

Thank you for giving me the time to share this message. And may God continue to bless America.

Debt ceiling options

About James D. Hamilton 244 Articles

James D. Hamilton is Professor of Economics at the University of California, San Diego.

Visit: Econbrowser

2 Comments on Debt Ceiling Options

  1. the debt can be fixed very easy just by taking everything away from the elderly
    and after it’s gone make sure congress votes themselves a raise a BIG raise

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