Opinion

The Great Debate

The budget is its own ‘debt ceiling’

It could be that President Barack Obama and the Republican House of Representatives will again be able to avert fiscal and financial chaos through a short-term, ad hoc agreement on government funding and the “debt ceiling” limit. This would be good news for the world and its markets.

Going forward, however, we should repeal the 1917 Liberty Bond Act — the source of the “debt ceiling” regime that everyone’s talking about. This was effectively superseded by today’s budget regime, enacted under the Congressional Budget and Impoundment Control Act of 1974. Making this explicit by repealing the 1917 “debt limit” regime is preferable to leaving things merely implicit as they are now.

In what sense does the 1974 regime “implicitly” repeal the 1917 regime? To answer, begin with this apocryphal early 20th century statute familiar to some lawyers: This law supposedly imposed a strange, impossible requirement on two train conductors when their trains approach from opposite directions. The conductor of each train was to stop, await the other train’s passage and then continue the journey. If read literally, of course, this statute would leave trains idling indefinitely on the prairies, shutting down the railway. So the law cannot require what the “plain” language seems to suggest — nor would any court rule this way.

Something like this apocryphal impasse would confront the president if Congress did not raise the “debt ceiling” later this month.

On the one hand, Obama would be required — under the nation’s 1974 vintage budget law and continuing obligations — to keep paying the nation’s creditors and issue Treasury debt if tax revenues fell short of those payment commitments.

A 14th Amendment for all centuries

During the 1980s, a colorful Washington figure used to stand in Lafayette Square near the White House holding a sign: “Arrest Me. I Question the Validity of the Public Debt. Repeal Section 4, Fourteenth Amendment to the U.S. Constitution.” That section reads: “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.” As far as I know, the whimsical “protester” was never arrested; he wasn’t breaking any law. Congressional Republicans, if they force the United States into default on its debt, will be.

Even most journalists and policy wonks hadn’t heard of Section 4 until recently. But with a default on “the public debt” increasingly possible, many now find the subject gripping. What if the House Republican majority decides that they are just too angry to authorize repayment of the debt? They’d be violating the Constitution — but what would happen to the country, and to them?

During the debt-ceiling crisis of 2011, a number of scholars, including me, suggested that President Obama could end the standoff by proclaiming that Section 4 required him, as part of his duty to “take care that the laws be faithfully executed,” to set aside the debt ceiling and borrow enough money to fund payments on the debt. Obama later said his lawyers told him that was “not a winning argument.” This time around, White House Press Secretary Jay Carney has already said that “this administration does not believe that the 14th Amendment gives the power to the president to ignore the debt ceiling.”

from Paul Smalera:

Downgrading democracy

By Paul Smalera
All views expressed are his own.

The Washington debt ceiling debate over these past months was the throwing open of the doors to the democratic slaughterhouse -- let’s please not ever complain again about not being able to watch the sausage get made. Though our media window onto the killing floor surely contributed to the S&P’s downgrade of U.S. debt, that’s not an entirely bad thing, as I’ll explain in a moment.

The preemptive downgrade of U.S. debt breaks a disturbing ratings agency pattern: Too-late downgrades from S&P and the other ratings agencies in the cases of Bear Stearns, Lehman Brothers, AIG, Greece and Ireland among many others. In the econoblogosphere, reliably hind-sighted ratings-agency downgrades, whether of sovereign debt or a teetering company’s bonds, have come to be something of a dark joke. It’s overdue that S&P got itself back into predictive rather than reactive mode. Yet the company’s sovereign debt committee surely chose the wrong target in U.S. Treasuries and broke the late-downgrade pattern for all the wrong reasons.

The ratings agency’s decision reads like nothing other than a fit of pique towards the government institutions and American people that had come to blame it as a prime enabler of the global financial crisis. The agencies, as my colleague Christopher Whalen just wrote, “prostituted themselves and their special position of trust with respect to mortgage-backed securities and exotic derivatives.” To get a little more anatomical, executives at the ratings agencies churned out AAA ratings on CDOs and other risky debt -- debt that their analysis should have shown to be junk-bond quality at best -- because they risked losing business if they were too critical. (Call it the, “every John is the best lover ever” theory of credit rating.)

Is the debt-ceiling deal hated because it will work, or won’t work?

By James Ledbetter
All views expressed are his own.

As is so often the case when markets drop vertiginously, the explanation you get for what is happening depends almost entirely on whom you ask. There is, for example, a broad consensus that the debt-ceiling deal was a major contributor to the market plunge that kicked in last week.

But, what, precisely, are investors objecting to when they sell in reaction to the debt deal?

That depends.

To hear the deficit hawks tell it, the problem is that everyone can see that the deal was an effort to delay real decision-making on the U.S. debt. My colleague Gregg Easterbrook calls the deal “as phony as a $3 bill,” and argues that stocks dropped precipitously when “markets learned that people at the top of the government of the United States were going to do nothing at all about the national debt, beyond acting like windbags.”

Assessing the debt ceiling damage

By James Hamilton
The opinions expressed are his own.

Reuters invited leading economists and writers to reply to Larry Summers’ op-ed on his reaction to the debt ceiling deal. We will be publishing the responses here. Below is Hamilton’s reply. Here are responses from Laura Tyson, Benn Steil, Russ RobertsDonald BoudreauxRobert Frank and James Pethokoukis as well.

I much agree with the substance of Larry Summers’s observations on the recent debt deal.

Let me begin my thoughts by suggesting that the debt debate lumped together three issues that I regard as separate problems. There was first the immediate challenge of how the U.S. government was going to pay its bills for the rest of August. Second is the near-term need to bring unemployment down– we need to see more robust economic growth in order to get Americans back to work as quickly as possible. And third is the daunting challenge of putting U.S. fiscal policy on a sustainable long-run course– debt cannot continue to grow as a multiple of GDP, and something needed to change to ensure that it did not.

Entitlement reform would indicate maturity

By Russ Roberts
The opinions expressed are his own.

Reuters invited leading economists and writers to reply to Larry Summers’ op-ed on his reaction to the debt ceiling deal. We will be publishing the responses here. Below is Roberts’ reply.  Laura Tyson, James HamiltonDonald BoudreauxRobert Frank, Benn Steil and James Pethokoukis as well.

Summers begins with a refreshing instance of honesty about the effect of the debt deal:

Despite claims of spending reductions in the $1 trillion range, the actual agreements reached so far likely will have little impact on actual spending over the next decade.

Regretting raising the debt-ceiling

By Donald Boudreaux
The opinions expressed are his own.

Reuters invited leading economists and writers to reply to Larry Summers’ op-ed on his reaction to the debt ceiling deal. We will be publishing the responses here. Below is Donald Boudreaux’s reply. Here are responses from Laura Tyson, James Hamilton, Robert Frank, Russ Roberts, Benn Steil and James Pethokoukis as well.

Larry Summers’ cynicism about the new debt deal is justified. What, indeed, is the baseline from which $1.5 trillion is to be subtracted?

That there’s no clear answer to this question — and that there’s no serious effort to avoid the coming explosion of entitlement spending — drives home the truth that this deal really is nothing more than, as The Economist describes it, “a mishmash of expedient stop gaps and promises.”

Washington’s next challenge

By James Pethokoukis
The opinions expressed are his own.

Reuters invited leading economists to reply to Larry Summers’ ope-d on his reaction to the debt ceiling deal. We will be publishing the responses here. Below is Reuters Breakingviews columnist James Pethokoukis’ reply. Here are responses from Laura Tyson, James Hamilton, Robert Frank, Russ Roberts, Benn Steil and Donald Boudreaux as well.

Like Larry Summers, I have a “multifaceted reaction” to Washington’s debt ceiling and budget deal. In fact, I have the exact same multifaceted reaction, except driven by completely different rationales.

1. Like Summers, I feel relief — but not because the agreement averted default and avoided harsh austerity. While the package doesn’t fundamentally change America’s fatal fiscal trajectory, it keeps the legislative momentum headed in the right direction with a focus on reducing debt via spending cuts rather than tax increases.

Political strategy in the Budget Control Act era

By Keith Hennessey
The opinions expressed are his own.

I cover three topics in this post: what important players won in this deal, the core concepts and tradeoffs within the deal, and what the different strategies might be this Fall under this bill when it becomes law. The President’s priorities

The President knows he will get debt limit increases through early 2013 no matter what House conservatives/Tea Party members do. Those Members can no longer “hold a debt limit increase hostage” before the 2012 election.

We could also describe this as eliminating liquidity risk through 2012.

Assuming someone doesn’t find a way out of the enforcement mechanisms in the bill (1 in 3 chance), there will be at least $2.1 T in deficit reduction over the next 10 years as a result. While I think that’s a big policy benefit, I’m not sure how important that is substantively to the President. (Is he for stimulus? Austerity? Who knows at this point.)

Debt police go rogue

By Zachary Karabell
The opinions expressed are his own.

As the debt-ceiling storm intensifies, some reports indicate that the White House, and perhaps the global financial markets, are less concerned with paying bills after Aug. 2 than with credit-rating agencies imposing their first-ever U.S. government downgrade, from AAA to AA+.

How did it come to this—that a trio of private-sector companies could wield such enormous influence? More specifically, a trio that has proven chronically behind the curve, analytically compromised, and complicit in the financial crisis of 2008–09 as well as the more recent euro-zone debt dilemmas? Somehow, these inept groups again find themselves destabilizing the global system in the name of preserving it.

While there are more than 100 credit-rating agencies worldwide, three—Moody’s, Fitch, and Standard & Poor’s—occupy their own particular universe, the products of a New Deal ruling from the SEC that enshrined “nationally recognized statistical rating organizations” to ensure that the bonds held by insurance companies, banks, and broker-dealers were appropriate for their capital requirements.

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