Friday, January 31, 2014

The Debt Ceiling Abroad

-- Posted by Neil H. Buchanan

I am in the airport in Tokyo right now, returning home after two-plus weeks abroad.  Last night, I gave a talk to the Japan Tax Association, explaining the debt ceiling situation and the various arguments that Professor Dorf and I have offered in our writings.  (There was an interpreter, who would translate after every sentence or two.  The stop-and-go nature of that format was an interesting experience, to say the least.)  The Q&A there, like the Q&A after I delivered a similar lecture last week at the Australasian Tax Teachers' Association in Brisbane (Australia), alternated between polite versions of "What the hell is going on over there?!" and "Why can't the courts solve it?"  None of my answers satisfied anyone -- certainly not me.

In a conversation before my lecture, I did learn that Japan's government, although structured as a parliamentary system, nevertheless nearly had a debt ceiling-like crisis very recently.  Apparently, they do not have a debt ceiling, but they are required to have a law that authorizes borrowing.  Or, more accurately, they have a law that requires the government to authorize borrowing to finance a deficit on the government's "operating budget."  What is an operating budget, you ask?  This is an issue about which I have written in my pre-debt ceiling scholarship (see especially, my Good Deficits article), and I have commented on it regularly here on Dorf on Law (e.g., here).

An operating budget is the counterpart to a "capital budget."  Almost all entities of any size separate their accounts into spending on items for immediate use/consumption, and spending on items for investment that will allow the entity to grow over time (and, in the case of for-profit enterprises, to increase profits over time).  The basic idea is that it is OK to borrow the money necessary to buy capital/investment items, because they pay for themselves over time -- "you have to spend money to make money."  Current operating expenditures, on the other hand, need to be paid from current revenues.  This is the "golden rule" of budgeting.

As I noted above, almost all entities of any size use capital budgeting.  The U.S. federal government does not.  Japan's does, and they thus are able to protect investment spending from any shenanigans regarding authorizing borrowing on an ongoing basis.  They do, however, have a legal structure that allows politicians to create something like a trilemma.  If the operating budget is out of balance, but the Diet (legislature) does not vote to authorize the concomitant borrowing, there is the same arithmetic impossibility for default that the Tea Partiers have been trying to create in the U.S.

Apparently, the minority party in one house of the Diet held up the borrowing authorization long enough to necessitate emergency actions, which sounded awfully similar to our "extraordinary measures" here.  In conversation with my Japanese hosts, I was not able to determine whether the canceled/delayed spending would constitute outright default, had it continued for more than a few days, but at the very least, there was some amount of nail biting (and short term financial pain, for various federal budgets and recipients) regarding the outcome of that manufactured crisis.  After an initial bit of bluster and posturing, the opposition party simply came to its senses, as opposition parties in the U.S. used to do.

As Professor Dorf and I note in our new paper, Australia (to our surprise) until recently had a debt ceiling law of some sort.  Recently, however, quite consciously in response to the U.S. debt ceiling madness, the Aussies repealed their debt ceiling.  Interestingly, in the same bill, they apparently strengthened the capital budgeting system that was already in use by their Treasury.  So, they managed to get it doubly right: no to the inherently dangerous debt ceiling, yes to a fundamentally sound capital budgeting system.  Good on ya, mates!  Wish we could learn from your example.

Back in the U.S., we will soon see where things go after the debt ceiling is reinstated next Friday.  Recent reports indicate that the Republicans are not going to fight too hard against a clean increase in the debt ceiling next month.  As I pointed out to my listeners last night, however, there were similarly soothing reports this past August and September, suggesting that the Republicans would never shut down the government and mess with the debt ceiling again.  Past performance is no guarantee of future returns, but we can at least take current assurances with a truckload of salt.

Even if we see relatively little drama this time, however, even the don't-worry-be-happy reports suggest that the Republicans plan to extend the ceiling only through January 2015.  At that point, fresh off of what they hope will be big wins in the mid-term elections (although it matters not at all for these purposes), they will make their fateful stand on the debt ceiling.

Meanwhile, if the Republicans do pull their punches this time, the Obama people will surely claim that their stare-down strategy has been validated.  Until the next time.

31 comments:

Paul Scott said...

So, btw, when you make a claim that the debt ceiling statute is unconstitutional, do you mean only that part that is the ceiling, or do you mean the entire thing (including that part that authorizes debt)?

In the absence of the entire statute, would your position be that all things being otherwise equal to today, that if Congress was unable to pass an authorization for debt, that the executive would have the inherent authority (and presumably obligation) to do so?

If not, then what is so special about the statute that creates such power an obligation, but not a limit?

If so, then how do you distinguish this from Fuller's (? do I have that right?) position that when Congress authorizes spending, such authorization contains an inherent authority to authorize debt?

Thanks.

Michael C. Dorf said...

Just the ceiling. I have seen claims that the debt ceiling statute is "part of" the authorization for borrowing but if that was ever true, it's certainly not true now. As Neil and I explain in the text at footnotes 16-21 of our third debt ceiling paper, tinyurl.com/npdmsdg , the authorization to borrow is contained in a different statutory provision from the debt ceiling and there is simply no reason to think that the two provisions are inseverable.

Now, I do think that things might well look different if Congress had NEVER authorized any borrowing but had directed spending in excess of tax revenues. Reasonable minds could differ on whether that would tacitly authorize borrowing, or whether such borrowing would be unconstitutional but less unconstitutional than default, or whether default would actually be better in those circumstances. But because the background borrowing authorization has remained on the books throughout the crises, we haven't had to address that question.

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prince wei said...
This comment has been removed by the author.
Evin Terna said...
This comment has been removed by the author.
Evin Terna said...

In the absence of the entire statute, would your position be that all things being otherwise equal to today, that if Congress was unable to pass an authorization for debt, that the executive would have the inherent authority (and presumably obligation) to do so?http://lol.mmo18.com/ | fifa14.mmo18.com

Priyanka Singh said...

Debt Ceiling is the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations. money cash from direct lender
the authorization to borrow is contained in a different statutory provision from the debt ceiling and there is simply no reason to think that the two provisions are inseparable.

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