Thursday, July 21, 2011

The Debt Ceiling

The world of politics keeps on spinning and as a student of economics I try to learn as much as I can and to a large extent keep my mouth shut because I, by definition, don't know everything yet.  The situation is that the U.S. government has already reached the limit for the amount of money that it can borrow and has been using some internal creative accounting to finance expenditures over that amount.  On August 2nd, they will have exhausted those means for acquiring money and will not have enough money to pay their bills which include the U.S. Treasury bonds that come due.  If they do not pay those Treasury bonds in a timely fashion, we will have defaulted on our debt and there will likely be substantial fall-out.

Most or all Democrats say that we should raise the debt limit immediately.  Republicans have more mixed feelings about it.  Some are opposed to raising the limit no matter what.  Others want to extract substantial spending cuts and some would even like to vote on a balanced budget amendment to the Constitution.  Financial experts are warning that a U.S. default would have dire consequences for the domestic and international economy, so why is Congress cutting it so close?

In part, it is because they disagree about fundamental aspects of the debate including whether we will actually default.  Many Republicans assert that on August 2nd, when money runs short, the Treasury department can pick and choose which programs to fund and which not.  It is assumed, in this first scenario, that no matter which programs get chosen for no payments or delayed payments, the bonds will be paid.  This is an enormous assumption because it would be completely unprecedented.  The second scenario is the President can simply ignore the debt limit citing the 14th amendment to the constitution:

Section 4. 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.
I think both of these scenarios would be challenged in the courts on Constitutional grounds.  Obviously if the President ignores the Debt Ceiling law, he will be sued (by Congress? or members of Congress?) and it will probably get an express train to the Supreme Court.  I have no idea what they will say about this, but it doesn't seem like a great scenario if we haven't struck a deal by the time the Supreme Court has to give an ultimate ruling.  Former President Clinton has said that he would pursue this course of action if he were in office.

The first scenario is also fraught with risk.  For one thing, government expenditures and income are very uneven.  We risk not having working capital for the day to day operations of critical elements of our government (military, courts, and debt.).  The reason that August 2nd is the day is because we have an enormous amount of checks to pay out on August 3rd (mostly for Social Security).  Will this mean that Social Security must be cut for this option?  Many Republicans are bringing up the various sillier parts of the federal budget like research grants for this and that, foreign aide, the national parks, etc.  They insinuate that we can simply choose to cut those out.  What if those aren't the checks that are due that day?  What if it's checks for V.A. hospitals, or soldier's pay checks, or the electric bill at the U.S. Congress building.  What if any of those are the ones that push us over the limit?  It seems likely that the Social Security checks on August 3rd will be the ones that we will not have the means to pay.  If that is the case, are Republicans really comfortable cutting Social Security with no warning?  That would mean a lot of people on fixed incomes would not get a check, and there would be consequences to that.

Many people say that we should cut spending, including Social Security, and that this is a way to do that.  That may be true, but this would be perhaps the worst way to cut Social Security... even if it were simply a temporary cut.  Most Americans that receive Social Security completely depend on it for their means of survival.  Major changes to this program would require a lot of advance notice and would cause major changes in our entire economy.  For many Americans, it would be completely impossible for them to resume working, and it is morally unfair not to give them retirement benefits which they have been paying into their entire working lives for.

That's not even the worst case for the first scenario.  The worst case is that the Treasury department decides that it does not have the Constitutional authority to make spending decisions and simply continues to pay the bills as they come in until they have no more money.  Then, as soon as a U.S. bond comes in without any working capital in the U.S. account, we will officially default for the first time.

I agree with other financial experts that a U.S. default would likely be the worst bankruptcy of all time.  It would make the Lehman Brothers collapse look like a minor event.  I don't care to go to much into the speculation, because it's impossible to truly speculate on what that event would be like, so I'll simply call it a "game changer" for the global economy.

For my entire life, I've wondered why the U.S. government spends so much money.  I've always been for cutting government expenditures and have never really understood why we even ran a deficit on such a regular basis.  I support passing some version of a balanced budget amendment even if it's watered down and has opt outs in times of war.  Still, I think Republicans might be risking a default just to make a point about the deficit and debt, which is nonsense.

It seems that the general public, which has handed elections over to Republicans since President Obama's historic win has also grown doubtful over Republican handling of this impasse.  So, please, Democrats, Republicans... MAKE A DEAL!

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