Tuesday, April 12, 2011

What Happens If the Debt Ceiling is Reached?

This is the second of two posts about the debt ceiling. To read the first, see Why are People Opposed to Raising the Debt Ceiling?

We're still about a month away from the day when the debt ceiling deadline passes, but it's not too early to start talking about the end game if an agreement to extend the debt ceiling can't be reached. (This also wouldn't be the first time Congress delayed to raise the debt ceiling either.)

The first thing that will happen is that the Treasury will implement certain "extraordinary measures." These measures aren't really that uncommon when the debt ceiling is close, and essentially amount to the government shifting money around from certain accounts to other accounts to make up for the shortfall. The Treasury thinks that this will allow the government to keep functioning as normal until about July 8th.

But what if we still don't have an agreement?

There are three main courses of action that the Obama Administration could probably take in this case.

1) Shut Down Government

This scenario is basically the scenario that the Tea Partiers want to see happen: the government only spends what it takes in, and that's it. Virtually all discretionary spending would stop. Military spending would probably be halted except for necessary spending.

While interest on the debt would probably be paid, preventing a technical default, and Social Security payments would still go out due to it's own source of funding, at least for a while (pending funding for the Social Security Administration), payments for Medicare, Medicaid, Food Stamps, Pensions, Veterans Benefits, etc. could all be impacted. If things get bad enough, a technical default becomes a real possibility, though is unlikely to happen right away, depending on what payments Obama may be legally required to make and how much revenues may drop if the economy goes into a double dip recession or depression.

The sudden stop of over $100 billion into the economy per month would certainly harm the economy, and most economists and business leaders fully expect hitting the debt ceiling to be a "recovery ending event." Even if the United States doesn't default, it will probably take years, if not a decade, to clean up the mess that hitting the debt ceiling could cause.

2) Send out IOUs

This is essentially the "California Solution." This solution would probably cause a partial shutdown of non-essential government services, but the treasury may continue "spending" more money than it takes in by handing out IOUs to agencies and creditors that it doesn't have the money to currently pay.

The Treasury wouldn't technically be violating the debt ceiling since it isn't technically spending money - it's giving out IOUs. And the Treasury would argue that it has the authority to do this since the US Congress appropriated the authority for it to do so. Just because the Treasury doesn't have the money now doesn't mean that it can't continue funding programs. After all, Congress authorized them to.

Of course, there are some constitutional questions about this, such as can the Treasury promise to spend money it currently doesn't have, and do appropriations by Congress really authorize them to give out IOUs in those circumstances?

3) Declare that Congress Implicitly Extended the Debt Ceiling by Approving the Budget

This would almost certainly create a constitutional crisis, so it's not really the preferable solution, but it could finally decisively resolve one of the paradoxes of how the federal government runs: How can Congress appropriate money to be spent, and then prohibit the Treasury from borrowing to spend that very money?

The argument would essentially go like this:

There are two powers that the Constitution gives to Congress that are applicable here - the power to "borrow money on the credit of the United States" (Article I, Section 8, Clause 2) and the implicit power to appropriate money suggested both by Article I, Section 8, Clause 1 ("The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States") and Article I, Section 9, Clause 7 ("No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law")

The question here is this: would Congress appropriating more money to be spent than is brought in via revenue be an implicit approval that the Treasury should be able to borrow at least that much money?

In other words: wouldn't the very act of appropriating money in a way that would increase the national debt constitute an implicit approval to raise the debt ceiling on the part of Congress? Indeed, prior to 1917, Congress extended the borrowing authority of the United States with each budget. However, they then decided to approve the debt ceiling separately to giver the treasury more leeway in borrowing.

Republicans would certainly argue that the power to appropriate and the power to borrow are two separate and independent powers in the Constitution. However, are they really? All the power of Congress to extend debt does is allow the federal government to run an unbalanced budget. And, again, it seems logically inconsistent that the founders would believe that Congress had the ability to authorize money to be spent without simultaneously authorizing the Treasury to borrow the money needed to meet those obligations, if necessary. After all, it is ultimately Congress' responsibility to ensure that the debt gets paid down. Saying that Congress refuses to pay down the debt, but authorizes additional deficit spending, but then fails to authorize borrowing to allow that very deficit spending is silly.

I don't think anyone would argue that Congress doesn't have the authority to authorize more debt than it appropriates for. The question here is whether Congress automatically authorizes new debt when it passes a budget with deficit spending.

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