Friday, September 13, 2013

Understanding the Debt Ceiling

The Republicans are threatening not to raise the debt ceiling.  If the Debt Ceiling is not raised by around early October, there will be serious consequences that may damage the economy, cause a significant decline in the stock market, and slow or stop the economic recovery.  These bad things would occur largely because individuals, stock markets and foreign countries will lose faith in the willingness and ability of the U.S. Government to meet its obligations and keep its word.  So, NOT raising the debt ceiling is a significant issue.  But, it WILL NOT do what most Americans probably think it will do because most Americans, including many Congressmen, have no idea what will actually happen if the debt ceiling is not raised.

This issue came to my attention as I read the results of a NBC/WSJ poll I discussed in a previous post.  One of the questions in the poll had to do with the debt ceiling.  The pollsters asked:

"As you may know the federal debt ceiling acts as a check and limit on the country's liabilities, including the federal deficit and other debts.  When the U.S. Treasury needs to issue debt above the ceiling in order to avoid going into bankruptcy and defaulting on its obligations, Congress needs to vote to raise the ceiling.  Congress is again currently considering whether and how much to extend the debt ceiling.  Do you think Congress should or should not raise the debt ceiling?  If you don't know enough to have an opinion, please say so."

44% of Americans said the debt ceiling should NOT be raised.
22% said it should be raised.
34% said they didn't know enough to have an opinion or were not sure.

Now, this was a very poorly worded question and probably biased the results.

Anyone hearing the first sentence would come away with the idea that the debt ceiling is "a check and limit on the country's liabilities, including the federal deficit and other debts."  In other words, the implication is that NOT raising the debt ceiling is a way to control federal spending and reduce the deficit which is something many Americans have been told we must do.  That's just not true.

If the debt ceiling IS NOT raised, the U.S. Treasury will have trouble paying the country's bills ON TIME but would not be relieved of the obligation to pay the bills eventually.  If the debt ceiling is reached and Congress doesn't not raise it, the U.S. Treasury Department will have to start paying bills based upon the revenue it has available each day.  For example, let's say that a million dollars worth of bills are coming due on October 1st but as of that date Treasury has only $900,000 available.  Since Treasury has reached the debt ceiling and the Congress has refused to raise the debt ceiling, Treasury can not borrow the $100,000 it needs to pay the October 1st bills.  Somebody is not going to get paid, maybe some members of the military or someone who contracted with the federal government to build a ship or airplane, clean a government building and so on.  Some federal money that was scheduled to be sent to the states on October 1st might not go out on time.

With no increase in the debt ceiling, Treasury will be stuck with paying the bills with the amount of revenue it has as the bills come due.  BUT, and this is a BIG BUT, Treasury will eventually HAVE TO PAY THE BILLS.  The Executive Branch CANNOT refuse to spend money Congress has already authorized.  It CANNOT just not pay interest and principle on debt obligations it has already incurred as a result of prior Congressional authorization.  AND, the executive branch CANNOT declare that the U.S. Government is bankrupt. In fact, the whole idea of the U.S. Government going bankrupt is laughable for one very good reason.  All debts and obligations of the U.S. Government are payable in U.S. Dollars, dollars the U.S. Government prints.  Theoretically, the U.S. Government, unlike me or you, can never run out of money since it can just print all it needs.  Now, there are very good reasons (like causing hyperinflation) why running the government printing press 24 hours a day to print money is a bad idea but legally it could do that--with Congressional authorization.

The Debt Ceiling IS NOT and NEVER HAS BEEN a check and limit on the country's liabilities.  Congress is the only check on the country's liabilities through its power under Article I, Section VIII and IX of the Constitution.  It does this NOT by passing a Budget--which is only a plan--but through the passage of specific Appropriation Bills which tell the Executive Branch how much money it MUST spend and for what purposes.  Once Congress passes an appropriation bill and the President signs it, it becomes law and it is illegal for the Executive Branch to NOT spend the money or to spend it for something Congress has not authorized in the law. In short, all debts and obligations that the federal government has are debts and obligations established by law.  Of course, Congress could repeal these laws.  It could pass a law saying as of a certain date, the U.S. Government would no longer pay interest and principle on treasury notes that are outstanding and if the President signed such a law then the U.S. Treasury could not legally make such payments.  Congress could pass a law saying to a ship builder that the U.S. Government would not pay him for the ship he delivered and if the President signed that bill, it would be illegal for the U.S. Treasury to pay for the ship.  Of course the Supreme Court might declare that such a law reneging on a legal debt was unconstitutional but that would be up to the court.

Bottom line:  The whole idea of a debt ceiling is pretty dumb.  It is not a means for controlling government spending or reducing the deficit.  That's the job of Congress through its power to raise revenues and appropriate money. 

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