Posted by wlansden |
Filed under commentary, finances, government
By James Bowden
I am now knowingly wading into a political subject in the most non-partisan manner I can manage, with an eye to the legal issues surrounding congressional action (or, to date, inaction) raising the debt ceiling. I am sincerely looking forward to your comments on the many ways that I have failed.
Currently, the U.S. Federal Government is subject to a limit (right now set at $14.3 trillion) on the amount of outstanding borrowings it may incur. On May 16, the debt ceiling was reached; the Treasury Department is now transferring funds across accounts (mainly raiding pension accounts, etc.) in order to keep the government in business. They can only do this for so long until the government will be shuttered for inability to pay its obligations, and worse yet – possibly default on its outstanding debt. But the limit is statutory, not market-driven; the historically low cost of borrowing that the U.S. enjoys indicates that lenders still see the U.S. T-Bill as a sound investment, even (and in spite of) recent warnings issued by credit rating agencies to the contrary. Only an act of Congress can increase the limit on the government’s credit card.
The debt ceiling was enacted in 1917, as a way of limiting aggregate debt (rather than requiring congress to individually authorize each debt issuance). This action modernized the U.S. government’s financial position by allowing the government to turn over its debt, much like large corporations. The problem is that a vote on the debt ceiling, particularly in an atmosphere where public debt is heavily scrutinized, is a deeply political issue – and currently both Democrats and Republicans are making noises that the ceiling may not be increased, or may be increased only in conjunction with drastically deep budget cuts. But what if on the day the Government ran out of funds the Treasury Department just went ahead and issued bonds – effectively exceeding its credit limit?
It ends up that some folks in the legal world believe that Congress cannot constitutionally or legally deny the executive branch the ability to incur debt in order to fund the programs already authorized by Congress. Effectively, when Congress passes a budget, be it balanced or projected to require deficit spending, it is instructing the Executive Branch to do certain things and implicitly obligating the government to the expenses related to those things. Refusing to increase the debt ceiling is in effect saying that the government must do certain things but doesn’t get the money with which to do them. It is, perhaps illegally, counteracting its own laws and attempting to undermine the validity of U.S. debt.
The constitutional argument that the debt ceiling is illegal is rooted in Section 4 of the 14th Amendment, which in effect prohibits public debt authorized by law from being questioned. The genesis for this provision came out of the aftermath of the Civil War, when southern lawmakers were contesting the debts incurred by the Union fighting the Confederacy. It’s not just supporters of the current President that hold this view, either: Bruce Bartlett, an avowed political independent and fellow blogger who advised President Reagan on economic issues, has argued that the President should consider the debt limit a nullity for just this reason. The granular question is whether public debt is incurred when the Treasury issues bonds, or when Congress passes budgets requiring those bonds to be issued.
The stakes are high on this one - it is deeply unlikely that the Treasury will disregard the debt ceiling and set of the inevitable constitutional crisis that would follow. But what about default? If the U.S. were to default on its debt, the fallout could make the financial Armageddon that was the financial crisis look like a minor nuisance, and we’re still trying to dig our way out of that one. And while it would seem unlikely that Congress would pull down the temple on top of themselves, the folks in the house have made a bad policy decision for penny wise, pound foolish political reasons before. And if you want to take a look at what policies and circumstances led to the debt level we currently (*ahem*) enjoy, here’s a helpful chart.
So, is Congress’s possible punt on the debt ceiling well analogized to the story of Sampson? I’d say there are a few major differences, two of which bear mentioning: first, Sampson didn’t build the temple that he destroyed, and second, Sampson knew full well the consequences of his actions.
<<< *An earlier version of this post indicated that the U.S. debt ceiling was established in 1939, when it was in fact established in 1917 by the Second Liberty Bond Act of 1917. In 1939, the debt ceiling was revised to its modern iteration of an aggregate limit, applicable to nearly all debt of the U.S. Federal Government. Thank you to Bruce Bartlett for the clarification.>>>
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