Thursday, August 03, 2017

The Debt Ceiling for (Republicans and Other) Dummies

By Neil H. Buchanan

Republicans in Congress and their allies in the Trump Administration should have one overriding priority right now, and that is to repeal the debt ceiling statute.  Note that I did not say that their goal should be to increase the debt ceiling, although that is the more likely -- and, absent an outbreak of sanity, necessary -- path that they must follow.

The one thing that they cannot do is nothing, because that would lead to an unprecedented disaster.  The problem is that there is so much misinformation and ideological posturing about the debt ceiling that it is only too easy for fake populists to pretend that the debt ceiling is not a big deal or that other issues take priority.  They are dangerously wrong.

Even though we have been through debt ceiling standoffs multiple times over the past six years, there is still a great deal of misunderstanding about the issues and the stakes involved.  Here, I will explain what is happening, what could happen, and why the different approaches to the debt ceiling matter.

In particular, I will explain why I would stand with the Trump Administration (a statement that I never expected to make) if they took what would seem to be a radical step and ignored the debt ceiling when the time came.  With or without that, however, a huge crisis faces us unless Republicans in Congress fix this problem soon.

The most important initial point to understand is that a debt ceiling crisis is very, very different from a government shutdown.  The two problems are frequently lumped together, for understandable reasons, but the stakes are wildly different.

A government shutdown happens when Congress has not passed laws that provide the funds necessary to run the government's operations.  The next time this could happen is on October 1, at the beginning of the next fiscal year.  Current law only allows the government to operate through September 30, and if Republican leaders in Congress are not able to get their act together in time, there will be another government shutdown.

As we learned in 2013, however, shutdowns are not the end of the world.  They are bad in a lot of ways, and even anti-government ideologues become angry when their own votes prevent the government from operating.  Because of laws allowing the government's "essential services" (law enforcement, border patrol, issuing Social Security checks, and so on) to continue during a shutdown, however, catastrophes do not ensue.

That is not to say that shutdowns are a good idea, of course.  They represent a failure of governance, and they create unnecessary strain and uncertainty for federal employees and citizens.  In an ironic twist, they also end up wasting money.  When ambitious politicians shut down the government to advance their careers (looking at you, Ted Cruz), they are rightly reviled.

A debt ceiling-related catastrophe is very different.  Such a crisis could come in one of two forms, only one of which is understood by the purveyors of the mainstream conventional wisdom, as separate articles by two safely orthodox Washington Post columnists recently demonstrated.

Jonathan Capehart, who reminded readers that "I’ve been warning y’all about this since March," described how the Trump Administration is at war with itself over the debt ceiling, with Treasury Secretary Steve Mnuchin arguing for a "clean bill" (a simple one-line statute to increase the ceiling by some unspecified amount) and budget director Mick Mulvaney arguing for putting conditions on such a bill (and generally saying that it is not a priority in any event).

Capehart thus agreed with economics columnist Catherine Rampell's description of Mulvaney as "the most dangerous man in Washington."  Why are Capehart and Rampell so upset?  Again, they are not wrong, but they are seeing only half the story.

Both are right that the debt ceiling statute has nothing to do with putting a ceiling on debt.  We have actually spent roughly half of the past six years with the debt ceiling in "suspension," because Senate Majority Leader Mitch McConnell somehow convinced Republicans that voting to suspend and later reset the debt ceiling at a higher level was not the same thing as voting to increase the debt ceiling.

Beyond the jaw-dropping dishonesty, what makes that recent history worth remembering is that we have lived without a debt ceiling, yet debt has not gone up without limit.  Debt goes up by the difference between the amount that Congress spends and the amount that Congress allows the government to collect in taxes, which means that every budgetary agreement contains its own debt ceiling.

One problem is that even center-left writers like Rampell cannot resist reinforcing orthodoxy while arguing against Mulvaney's insanity:
"The debt ceiling is a product of the misguided belief that limiting the official borrowing capacity of the government would force legislators into frugality. In reality, it has done nothing to curb financial profligacy."
This idea that the government has been engaged in "financial profligacy" is conventional wisdom on steroids, reinforcing Republicans' (including Trump's) claims that there is a looming debt crisis.  That is at best contestable, but the larger point here is that it is completely unnecessary and gratuitous for Rampell to toss that into her analysis.
This is a shame, because both Rampell and Capehart have the rest of the basic story right.  If Mulvaney's view prevails, and his former Tea Party comrades start playing games with the debt ceiling again, we really will face a crisis.
The nature of the crisis is more complicated than those writers seem to understand, however.  (I should emphasize that I do not mean to suggest that Capehart and Rampell are uniquely confused.  Again, they are merely stating the conventional wisdom.)  The Mulvaney approach would certainly create a crisis, but we do not know what form it will take.

What happens on the day that the debt ceiling becomes binding?  That is, what happens on the day when the federal government must pay bills that exceed incoming tax revenues but the debt ceiling statute purports to say that Treasury is not allowed to borrow the difference?  Current estimates indicated that this could happen sometime later this month or in September, depending on the daily flows of revenues and expenditures.

According to the conventional wisdom, exactly one thing could happen at that point: the government would have no choice but to stiff the people to whom it owes money.  In Rampell's words: "The United States will become a deadbeat."  That would be bad.
That would be so bad, in fact, that it would be unconstitutional.  As Michael Dorf and I have written (together and separately) over and over and over again, the debt ceiling law cannot be an excuse to reassign to the president Congress's responsibility to set spending priorities.  That was true when Barack Obama was president, and it is true now.

The basic issue is what Professor Dorf and I have called the "trilemma," in which the president is faced with three unconstitutional possibilities: refusing to spend money that Congress has appropriated (and which the government legally owes the recipients), collecting more in taxes than Congress allowed, or borrowing more than Congress has authorized.

The conventional wisdom is that the president must default on paying the government's obligations, but that is simply wrong.  Again, to do so is to give the president unprecedented authority to rewrite Congress's multifaceted decisions about spending, which is a much bigger violation of the separation of powers than borrowing in excess of the debt ceiling would be.

As we later added, moreover, the problem is even worse, because failing to pay bills when they are due does not even solve the problem that it is supposed to solve.  That is, if the president says, "I can't borrow the money needed to pay you what you're owed today," he has two ways to end that sentence:

"... so we'll pay you later," or

"... so we won't pay you at all."

If it is the latter, then that is an actual repudiation of a federal obligation, which is blatantly unconstitutional.  But if it is the former, all the president has said is, "I can't borrow money from other people to pay you now, so I'm going to promise to pay you the money at some later date."  That is what is known as "a loan" (and an involuntary one at that), which constitutes debt.  So federal debt would go up (in excess of the debt ceiling) in any event.

All of which means that the president is actually required, if Congress does not repeal (or at least increase) the debt ceiling, to respond to a trilemma by refusing to allow the country to become a deadbeat.

That does not, of course, mean that there would be no crisis.  In response to our arguments during prior debt ceiling standoffs, people have reasonably wondered whether anyone would buy government bonds under a cloud of political uncertainty.  Even if they did, it would certainly cause economic and political chaos for the president to authorize additional borrowing in that situation.

But it would also create economic and political chaos for the president to allow the country for the first time to fail to pay its bills, destroying the full faith and credit of the United States.  When it comes to failing to pay your bills, if "never" becomes "well, just once," everything irreversibly changes.

This means that the Buchanan-Dorf analysis does not lead to a "magic bullet" to make a crisis go away.  We merely say that one form of the crisis is required and the other form of the crisis is not allowed.  The only permanent solution is to get rid of the debt ceiling, eliminating crises altogether.

At this point, Trump is already in legal hot water, and his standing with Congress and the public reaches a new low every day.  He has no political capital that would allow him to say, "I recognize that the debt ceiling statute is both unnecessary and dangerous, so I am doing this counter-intuitive thing for the good of the country."

On the other hand, Trump has an apparently unlimited willingness to do things without caring about the blowback.  He might actually be willing to say, "You know what, I'm not willing to be held hostage by this debt ceiling thing."  That could lead to a tweet: "Debt limit illegal.  Congress must repeal.  I'm King of Debt.  Try stopping me!"

If he did that, maybe Congress would actually try to impeach him.  Even though I completely agree that Trump should already have been impeached for a variety of other reasons, however, he would be on solid ground here.  As I noted above, I would have no trouble supporting him -- on that issue, and that issue alone.

Again, however, we are talking about choosing between two different forms of a catastrophe that can easily be avoided if Republicans in Congress would simply grow up and understand that the debt ceiling must go.


t jones said...

"That is what is known as "a loan" (and an involuntary one at that), which constitutes debt. So federal debt would go up (in excess of the debt ceiling) in any event."
Seems like you're oversimplifying, since not paying a debt doesn't increase it (ignoring interest). I assume you're not mentioning that the government is constantly "borrowing" and repaying in the ordinary course of business, and the "borrowing" would continue while payment would slow down, increasing the aggregate debt on an unapproved schedule as time goes on.
Quibble aside, agree as usual.

Neil H. Buchanan said...

Thanks to t jones for the request for clarification. Here's the best way that I can come up with to think about this:

-- On a given day, a $100 payment comes due from Treasury to a would-be recipient;

-- No tax revenues are coming in that day;

-- The statutory debt ceiling is $1,000, and we are already at that limit;

The Treasury thus has two options:

-- Borrow $100 from someone who wants to buy a U.S. Treasury bond.
Result: Total federal debt equals $1100 (the original $1000 plus the new $100 Treasury bond).

-- Tell the intended recipient that we cannot pay her today, but we are not repudiating the debt. Result: Total federal debt equals $1100 (the original $1000 plus the new $100 IOU).

I suppose it's possible that this is a "win" for the feds, if they can not only force the stiffed would-be recipient to wait for her money (i.e., lend the federal government $100, even though she doesn't want to) but also pay her zero interest.

But I suspect that, either through the courts or because Congress (after finally resolving the then-current debt ceiling crisis) decides to do the right thing, the stiffed would-be recipient will probably receive interest (maybe even more interest than the ultra-low rates at which Treasury can otherwise borrow).