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.