Shutdown, default and the debt ceiling

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The refusal by the Republican majority in Congress to raise the ceiling on federal debt means that, on the one hand, they think this issue is so important they are willing to put the functioning of the federal government at risk, but, on the other hand, they are unable to come up with a plan to actually bring the budget under control, and so leave it to President Obama to figure out.

A lot of people who discuss this issue assume that this would mean that the federal government would default on its existing debt.  A default would be catastrophic.  U.S. government bonds would no longer be considered an absolutely safe investment, which means the Treasury Department would have to pay more interest to attract lenders.  This would not only mean the federal debt would compound at a faster rate.  It would push up U.S. interest rates generally.  It would be more expensive to take out a car loan, a home mortgage or a small business loan.

Fortunately there are other options.

The most likely option would be a partial shut-down of the federal government.  I can’t guess what would be cut.  Presumably the military and Homeland Security would be exempt.  Would the national parks be closed?  Would the Postal Service suspend or reduce mail deliveries?   I don’t know.  Would it be legal to reduce or suspend payments for Social Security, Medicare and other so-called entitlements programs mandated by law? I don’t know.  Would federal employees have to take a pay cut or suspension of wages? Maybe.

Another possibility would be that the Federal Reserve system would simply create money to pay down the national debt.  That, in fact, is the normal mechanism by which money is “printed.”  It is what was done with “quantitative easing.”  I can’t guess the long-term consequences of this would be, but it doesn’t seem like a good idea.  But it is an option (if the Fed agrees – admittedly, a big “if”).  Creating money by buying Federal bonds would provide a means to keep the federal debt within the legal limit while continuing the normal operations of the federal government.

The final possibility is that President Obama would simply refuse to comply with the debt ceiling on Constitutional grounds.  But such a confrontation wouldn’t be his style, and the Constitutional argument seems weak to me.  It rests on Section 4 of the 14th Amendment states that “the validity of the public debt of the United States, authorized by law … shall not be questioned.”  But it is an option.  He could make his Constitutional claim and see what the courts say.

I think any serious attempt to deal with the deficit problem would entail (1) increasing government revenues, (2) reducing military spending and (3) restoring a full employment economy.  Cutting off Social Security and Medicare to 85-year-old widows isn’t going to solve the problem.

Click on America’s debt: The debt ceiling and default for analysis of options by The Economist magazine.

Click on Debt Ceiling Doomsday: How Flirting with Default is Playing with Fire for an interview with Bo Cutter, who was director of the National Economic Council during President Clinton’s first term.

Click on The Political Winners and Losers of a Debt Ceiling Showdown for the second part of the Bo Cutter interview.

Click on Why Policymakers Should Ignore the Debt Ceiling for analysis of legal options by Marshall Auerbach of the Roosevelt Institute.

Senator Barack Obama in 2006 voted against raising the debt ceiling.  President Obama says he regrets that vote, as well he should.  But at least the Democratic opposition back then had sense enough to back down before the government had to shut down.

P.S.  I challenge those who want to cut “spending” in general to specify what governmental activities or programs they would eliminate or reduce.

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6 Responses to “Shutdown, default and the debt ceiling”

  1. olemike Says:

    While I certainly do not advocate letting the country default on it’s debt, I do believe the Republicans need to use this event to gain concessions from the Dems regarding spending. We all know that without some leverage used against them, the Dems will never reduce spending. They will only increase it. There will always be one more “good” thing they can do for us.

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  2. Anne tanner Says:

    I’m no expert, but I think I’d start on the defense budget. Why do we have 27 bases in Europe? I can see our hospitals there, but exactly who are we defending with the rest? And then onward to all the weapons systems that Congress keeps restoring to the budget after the Defense Department says it doesn’t want them.

    If it went entirely to paying down the debt, I’d be in favor of a temporary graduated tax increase as well.

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  3. Dave Ebersole Says:

    The refusal of the Republicans? I was thinking maybe the refusal of someone to submit a budget since taking office thereby avoiding the risk of critizism, might indicate the absence of leadership, not problem solving. This person has refused to work with Republicans other than to invite them for public ridicule. The thuggish behavior of the leader of the free world has much to do with the lack of of any useful dialog i.e. Paul Ryan’s proposal. I’d cut government grants, student loans and education

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  4. philip mause Says:

    Isn’t there a good argument that Congress is acting inconsistently because it is impossible to comply with the existing debt ceiling and to also comply with recent enactments cutting taxes and increasing spending. As a legal matter, when a legislature passes two inconsistent statutes, the law is clear that the more recent enactment prevails and the earlier enactment is automatically repealed by implication. Since the appropriations and tax reduction enactments are more recent, there is a very good argument that Congress has repealed the existing debt ceiling by implication and that the debt ceiling is now null and void.

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