Is the debt ceiling constituional?

[hgc]

This is not to say it won't be very messy if the administration needs to make massive unilateral spending cuts to avoid default. Clearly it is better that some kind of consensus budget be approved by congress. Right now it looks like the Republican congress that mhaze seems to favor has approved a budget which can not be funded by current revenues and the same Republican congress has decided to invoke a debt ceiling to override the budget they approved.

Is it even legal for the administration to take funds appropriated for other purposes, and shift them to debt payment?

 

[Darth Rotor]

I'd say there is no constitutional problem with infinite borrowing.

Nor is there a constitutional problem with Congress imposing a limit on borrowing.

In fact, a limit on borrowing makes the constitutional mandate that all debt is valid easier to abide by.

QFT. Well said, Joe.

This thread has me thinking: our federal government going into default might be unconstitutional. Interesting thought.

 

[JoeTheJuggler]

This thread has me thinking: our federal government going into default might be unconstitutional.

Well, that's the basic argument for the unconstitutionality of the debt limit. An unintended consequence of the current debt limit will be to cause us to default if it's not repealed or raised by August 2.

But I think the 14th Amendment isn't about unintended consequences. I think it prohibits Congress from reneging on our debt.

I think I'm wrong in my argument that default is not the same as invalidate for purposes of this argument, though. The legislative history shows that the reason for prohibiting invalidating debt was to protect confidence in federal papers (that is, to protect our credit worthiness). Also case law suggests a broad definition.

However, I still say the debt limit by itself does not directly cause default. As I said, one could easily argue that it's passing a budget that would violate the credit limit that does this. Or that the credit limit causes Congress to have to raise taxes (given the 14th Amendment). Obviously, by itself, the point of the credit limit was to make it easier to honor our debts.

 

[JoeTheJuggler]

Is it even legal for the administration to take funds appropriated for other purposes, and shift them to debt payment?

I think it's a moot point if the end result is to borrow money to cover debt service AND/OR paying for programs. But clearly Congress passed a budget that doesn't work under the current debt limit. I think if they fail to repeal or increase the debt limit, it authorizes Obama to decide either what DaveFoc said (which programs to cut) or to deem the debt limit to have been repealed by passage of the budget.

 

[davefoc]

I think it's a moot point if the end result is to borrow money to cover debt service AND/OR paying for programs. But clearly Congress passed a budget that doesn't work under the current debt limit. I think if they fail to repeal or increase the debt limit, it authorizes Obama to decide either what DaveFoc said (which programs to cut) or to deem the debt limit to have been repealed by passage of the budget.

The congress has passed conflicting laws and I don't know that there are any formal legalities to deal with that situation. Perhaps, this apparent constitutional requirement that the US pay its debts will be deemed controlling and Obama will just need to cut everything else across the board until outgo matches income. Or perhaps the supreme court might rule that congress is run by a bunch of idiots and until they can pass laws that are physically possible to comply with the administration can deal with the situation as it sees fit.

 

[JoeTheJuggler]

The congress has passed conflicting laws and I don't know that there are any formal legalities to deal with that situation.

I always thought the most recently passed law wins. Obviously it's better if that second of 2 conflicting pieces of legislation makes clear that it means to repeal or amend existing legislation, but I don't know there's any requirement that it do so.

Still, I predict they'll raise the debt limit just in time to avoid addressing these questions.

 

[davefoc]

I always thought the most recently passed law wins. Obviously it's better if that second of 2 conflicting pieces of legislation makes clear that it means to repeal or amend existing legislation, but I don't know there's any requirement that it do so.

That sounds plausible to me and if that logic holds Obama could raise the debt ceiling unilaterally?

Still, I predict they'll raise the debt limit just in time to avoid addressing these questions.

So do I.

ETA: Raising the debt ceiling unilaterally by Obama might have some really bad consequences.

1. Based on questionable legality, borrowing money becomes very expensive.
2. Gnarly constitutional issues might lead to domestic confusion.
3. Already problematic partisanship in the country divides country further and in unpredictable ways.

It seems really unlikely that congress will let it come to this, especially in light of the fact that, much to the dismay of his most vocal left wing critics, Obama seems to be acting rationally and is working towards a consensus compromise that will be in the national interest.

 

[davefoc]

delete

 

[JoeTheJuggler]

It seems really unlikely that congress will let it come to this, especially in light of the fact that, much to the dismay of his most vocal left wing critics, Obama seems to be acting rationally and is working towards a consensus compromise that will be in the national interest.

I agree.

What I find annoying is that this really is just a negotiation of quantities. Painting it as some quasi-religious commitment to an ideology is really not at all accurate. If you step back, the budget a 100% Republican Congress would pass would be more similar than different than a budget passed by a 100% Democratic Congress.

No where in the budget resolution would it ever be appropriate to issue ideological statements about "big government" or any such.

 

[Darth Rotor]

However, I still say the debt limit by itself does not directly cause default. As I said, one could easily argue that it's passing a budget that would violate the credit limit that does this. Or that the credit limit causes Congress to have to raise taxes (given the 14th Amendment). Obviously, by itself, the point of the credit limit was to make it easier to honor our debts.

Joe, the direction my thought was taking me is that a decision by the Congress, (or the Executive?) to default on valid debts would be unconstitutional. They therefore cannot make such a decision ... or, such a decision can be successfully challenged on constitutional grounds.

I am not sure that going into default comes out of a decision like that, but if at some point payments due cannot be met, the decision not to pay a given debt raises a serious constitutional issue that I think would be a clear breach.

This puts forth the idea that .... the government has no choice but to print more paper?

I am not comfortable with the downstream hazards that keep cropping up in my forecasting. Not at all.

 

[TraneWreck]

It seems really unlikely that congress will let it come to this, especially in light of the fact that, much to the dismay of his most vocal left wing critics, Obama seems to be acting rationally and is working towards a consensus compromise that will be in the national interest.

But massive spending cuts are not in our national interest. Obviously default needs to be avoided (let's recall that Boehner is using a tactic that has never before been attempted in American history to cram through spending cuts without raising any new revenue), but at a certain point it really does become a question of what's worse: defaulting (obviously horrible) or engaging in ridiculous austerity measures while the economy is still struggling.

We have already pulled the stimulus, meaning we're engaging in contractionary policies. Notice what is happening: terrible job report after terrible job report, businesses still sitting on massive cash surpluses.

It's clear that we're still suffering from a demand deficit. Cutting government spending will make this worse. What harms the deficit and the debt in the long run is an attenuated slump and a slow recovery.

We need to spend money now, while bond rates are still historically low, and focus on the long-term budget perspective. The story for how spending cuts will repair the economy is incoherent:

1) Cut spending.
2) Everyone is confident.
3) ???
4) Economy is fixed.

So I'm torn, the Republicans are literally insane. Even David Brooks turned on them, Wall Street is against them, they're off in some perverse fantasy world making Obama's job impossible, but Obama is repeating idiotic right wing talking points (families have to cut back, so should the government, derp, derp).

We're ********** no matter which way we go because though the answer is obvious and we're fully capable of solving our problem, our leaders (and roughly 50% of the country) either don't understand or don't care.

 

[BenBurch]

Required to pay, but prohibited from borrowing or taxing, the ONLY option is monetization.

 

[davefoc]

But massive spending cuts are not in our national interest. ...

I'm not so sure. Bush was spending at a prodigious rate for eight years and Obama expanded on that and yet the economic problems are still with us.

My thought is that a lot of the economic problems are due to the borrowing. The US borrows money to buy things from the Chinese and American workers lose their jobs and the government spends more money which leads to more borrowing to deal with the unemployed workers.

My sense of it is that Obama inherited a lot of very serious problems caused by the failed governance of the Bush administration. And way up on that list was massive unfunded spending. Unfortunately in my view, a lot of well meaning advisers told Obama that the answer was to spend lots of money to rev up the economy. One argument is that this averted a more serious recession, but has it or did it just delay the time when the unfunded spending needed to be dealt with?

What exactly did the rush of Democratic inspired spending accomplish? I think it might have harmed employment. The government got the money either from taxes or borrowing to pay for the stimulus package and if the government hadn't used tax money for stimulus purposes the private sector would have hired more people with the taxes that they kept and if the government hadn't borrowed more money from the Chinese the economy would not have had a lot of money borrowed from the Chinese to buy Chinese goods and further displace American workers.

I don't feel confident I understand this, but it looks like the US is at a crossroads to me. We can either bite the bullet and suffer in the short term while the government contracts the unfunded spending that was creating an unsustainable boom or the US can continue to destabilize itself with massive unfunded spending and suffer a financial collapse when the house of cards comes crashing down.

I understand that the great left wing notion is that there are a bunch of rich white guys out there that the government could tax at higher rates to solve all our problems. I think they're wrong. The tax rates for wealthy people are probably close to revenue maximizing right now, especially the capital gains rate which might be the most important issue as far as taxing rich people is concerned. Maybe the government can scratch up a few more bucks by raising the taxes on rich people a bit, but the reality is that this is not going to come close to making up the massive budget short falls.

Entitlements and the military need to be cut, although some of the pain of this can be mitigated by going after some sacred cows like the agricultural subsidies which are wildly against the national interest.

And while we're at trying to return to a sustainable economy we will probably need to take a good look at regulations that raise the cost of American labor. This means environmental laws, special interest union laws, workers comp laws, medical insurance tied to employment and anything else that prevents the American worker from being competitive in the world market. Undoubtedly this kind of talk horrifies the average liberal who has come to believe that the unintended consequences of noble sounding legislation don't exist. But they do, and the wasteland that is Detroit and the massive loss of manufacturing jobs in the US in general is just a small part of the evidence that they do exist.

 

[TraneWreck]

I'm not so sure. Bush was spending at a prodigious rate for eight years and Obama expanded on that and yet the economic problems are still with us.

My thought is that a lot of the economic problems are due to the borrowing. The US borrows money to buy things from the Chinese and American workers lose their jobs and the government spends more money which leads to more borrowing to deal with the unemployed workers.

This just isn't true. It is empirically false.

First, couching it as "borrowing money from the Chinese," is meant to make the process sound sinister. What's happening is that because of the world-wide economic downturn, America is the safest, best investment in the world. Investors, including the Chinese, are so anxious to put their money in our country, that the ten year bond rates (the best guage of investor attitude toward our nation) are at historical lows.

And right now workers are losing jobs BECAUSE the government won't spend money. The fiscal crisis caused a massive drop in aggregate demand. Because interest rates are at the zero bound, the economy cannot be stimulated by dropping the rates. Private spending has crashed.

In this situation, the government is the ONLY entity that can make up for that lack of private spending. That's why government spending has to increase right now. We need to be running higher short term deficits while we can borrow money at rates that are a fraction of our growth.

We have lost 500,000 government jobs during Obama's term, mostly from cutbacks at the state level. The real problem is not one of debt, it's of persistent high unemployment. Cutting spending more will deepen our problems, not solve them.

My sense of it is that Obama inherited a lot of very serious problems caused by the failed governance of the Bush administration. And way up on that list was massive unfunded spending. Unfortunately in my view, a lot of well meaning advisers told Obama that the answer was to spend lots of money to rev up the economy. One argument is that this averted a more serious recession, but has it or did it just delay the time when the unfunded spending needed to be dealt with?

Again, you have to look at the actual causes of the economic problems.

The stimulus "failed" because it was too small. Even with the stimulus being too small for the problem (which was explained when it was passed), it still saved around 3 million jobs, boosted GDP by as much as 4 points, and lowered the unemployment rate by 2%

What exactly did the rush of Democratic inspired spending accomplish? I think it might have harmed employment.

It didn't.
http://cboblog.cbo.gov/?p=967

The government got the money either from taxes or borrowing to pay for the stimulus package and if the government hadn't used tax money for stimulus purposes the private sector would have hired more people with the taxes that they kept and if the government hadn't borrowed more money from the Chinese the economy would not have had a lot of money borrowed from the Chinese to buy Chinese goods and further displace American workers.

Again, this is just empirically wrong. The stimulus funds are being pulled right now.

http://www.cbo.gov/ftpdocs/100xx/doc10008/03-02-Macro_Effects_of_ARRA.pdf

A small fraction of what was spent in 2010 was spent this year, and it basically disapears next year. Businesses are sitting on around $2 trillion of cash:

http://online.wsj.com/article/SB100...8652567988246.html?mod=WSJ_business_whatsNews

Tax rates are at their lowest since the 50's, the stimulus is no longer in effect, businesses have massive stocks of cash, if you are correct about your assessment of the world, why is unemployment ticking back up? The conditions you want are happening, and the economy is deteriorating.

This is, of course, because the problem is one of demand. There is only one entity capable of making up for the gigantic demand deficit.

I don't feel confident I understand this, but it looks like the US is at a crossroads to me. We can either bite the bullet and suffer in the short term while the government contracts the unfunded spending that was creating an unsustainable boom or the US can continue to destabilize itself with massive unfunded spending and suffer a financial collapse when the house of cards comes crashing down.

"Biting the bullet" in the short HARMS the economy. England "bit the bullet," engaged in austerity measures, and their economy is contracting. Austerity in the face of the empirical facts we're facing is a terrible, terrible idea. We learned this in the Depression, but for some reason we seem intent on making the same mistake.

But yes, I agree with you 100% that the unfunded liabilities incurred in the last decade were ill-advised and largely responsible for our problems. But that shouldn't stop us from taking proper steps right now.

The long term budget is an issue, but that outlook is harmed by a continued economic slump. SHort term deficit increases will lead to long term stability. Austerity measures will not.

I understand that the great left wing notion is that there are a bunch of rich white guys out there that the government could tax at higher rates to solve all our problems. I think they're wrong. The tax rates for wealthy people are probably close to revenue maximizing right now, especially the capital gains rate which might be the most important issue as far as taxing rich people is concerned. Maybe the government can scratch up a few more bucks by raising the taxes on rich people a bit, but the reality is that this is not going to come close to making up the massive budget short falls.

Again, this is just empirically false:

Entitlements and the military need to be cut, although some of the pain of this can be mitigated by going after some sacred cows like the agricultural subsidies which are wildly against the national interest.

Entitlements definitely need to reformed, I don't agree that there's any need to cut them. The problems with Medicare and Social Security are decades away. The real issue is the cost of health care in general, which, again, we know how to solve, but we won't.

As for the rest of the cuts, we do need to restructure payments, and we could do that now, but what we need is a net increase in government spending to close the demand gap until the economy recovers.

And while we're at trying to return to a sustainable economy we will probably need to take a good look at regulations that raise the cost of American labor. This means environmental laws, special interest union laws, workers comp laws, medical insurance tied to employment and anything else that prevents the American worker from being competitive in the world market. Undoubtedly this kind of talk horrifies the average liberal who has come to believe that the unintended consequences of noble sounding legislation don't exist. But they do, and the wasteland that is Detroit and the massive loss of manufacturing jobs in the US in general is just a small part of the evidence that they do exist.

If you want to start another thread on this, we can get into it, but this is a massive subject slightly different from the one we're discussing, which is already a slight derail of the OP.

 

[JoeTheJuggler]

Required to pay, but prohibited from borrowing or taxing, the ONLY option is monetization.

What's the prohibition on raising taxes?

 

[Freddy]

What's the prohibition on raising taxes?

The House of Representatives.

 

[JoeTheJuggler]

The House of Representatives.

Which would also rule out monetization, right?

 

[davefoc]

Tranewreck,
Thank you for your long thoughtful reply. I will think about it a bit more later but I think the first think to note about your chart is the vast majority of it is a projection and it is not clear why it is correct.

I have seen no projections that show a balanced budget any time soon and yet your chart shows the deficit declining. Isn't the only way it could decline is if the government began to pay it down?

Start the chart at the beginning of the Bush administration and the chart would show $5 trillion dolloars of national debt. Fast forward through 8 years of Bush and two plus years of Obama and the national debt stands at $15 trillion dollars. That is pretty friggin scary and anybody that thinks the US is somehow immune to the economic disasters that have befallen smaller countries because of uncontrolled spending are living in a dream land IMHO.

My second comment is that while you disagree with me quite a bit, I didn't find your arguments any more fact based than mine (which I wasn't too impressed with either). The philosophical distinction between your view and mine is, I think, that you believe in net the government is a creator of jobs. I don't. It gets its money by taking money from people who would have spent it and thereby created jobs and gives it to other people. If the government spent the money on projects that produced as many jobs as the private sector would have the situation might be a wash. Of course, often when the government spends money it does so in corrupt and/or inefficient ways, (witness the medicare drug scam or agricultural subsidies). But if we are just to look at jobs and not worry about the value of the expenditures the government spending can be a loser there as well. In the case of the stimulus spending some of that went to colleges that used it to keep salaries higher than could be sustained in a recessionary economy. When the stimulus ended colleges cut wages, so the alleged job benefit in that case obviously wasn't. If the money hadn't been taken away from private hands the private spenders would have hired people at market wages which since they were lower than the artificially high college teacher wages would have resulted in more people working.

Roosevelt, when he was dealing with the depression hired workers at market wages so he got a lot of people back to work and when conditions improved the people transitioned back to the private economy because as the economy improved higher productivity private jobs became available and out competed the government for workers. That is not what happened with the stimulus. The Democrats following in the tradition established by the Republicans spent a lot of money to help their particular interest groups and just created a bubble of higher paid workers so that when the program was over employment went back down.

 

[BenBurch]

Which would also rule out monetization, right?

Nope. Treasury is executive branch. Obama orders money printed to cover what Congress already appropriated and authorized.

 

[JoeTheJuggler]

I have seen no projections that show a balanced budget any time soon and yet your chart shows the deficit declining. Isn't the only way it could decline is if the government began to pay it down?

Deficit != debt. You don't pay down the deficit. It is merely the difference in any given time span (usually measured in the annual budget) between revenues and spending.