Debt Ceiling: Groping for Clarity
Americans may never understand what's at stake in the debt ceiling negotiations if government officials and the establishment media don't make an effort to be accurate. Their central message is that the United States will default if the debt ceiling isn't raised by August 2. In other words, the U.S. will default on its debt if it doesn't go further into debt. Really?
In the cover story on the Constitution for Time, Richard Stengel repeats the official line: "There are those in Congress and beyond who suggest that the U.S.'s not raising the debt ceiling and defaulting would be a lesson to a spendthrift government not to borrow more than it can repay." (Emphasis added.)
One corrective to the default position is Kevin Williamson, Exchequer at NRO, who writes: "Talk of a pending U.S. default is mostly irresponsible grandstanding."
Indeed, the 14th Amendment forbids default. And, unlike eurozone nations that have received bailouts, the U.S. has its own currency -- Greece and Ireland don't. So if it comes to it, Fed head Ben Bernanke can "print" any money we supposedly need.
Raising the debt ceiling is about taking on more debt. But what "default" means is: not being able to pay off existing debt, both interest and principal. The feds have more than enough revenue coming each month to pay interest. But as long as the feds are running a deficit, revenue cannot be used to pay off principal. So principal must be "rolled over" by selling new bonds to pay off old bonds. And therein lies a danger that is more unsettling than all the talk about default. That's because we depend on being able to find buyers for these new bonds so we can pay off the old bonds. Were we not able to do so, then the Fed would have to monetize the debt and the ensuing inflation would reduce America to Zimbabwe. The reduction in the value of existing money would represent the greatest theft in the history of the world.
So as long as America can find buyers to roll over the principal on our old debt, and as long as taxpayers provide enough revenue to pay off the interest on our old debt and as long as interest rates remain low, default is not a problem. The problem is in taking on new debt, because doing so tells the market that America is no longer a serious nation. It tells the world that we have a dysfunctional government incapable of cutting spending. And Williamson tells us we have $500B of old debt to roll over -- in August alone!
Another mistake the media is making is when it talks about "paying our bills," and Stengel falls for this one, too: "[W]e need to pay off the public obligations that we do set for ourselves, whether those are Social Security payments to retirees or interest to Chinese bankers."
The conflating of "Social Security payments" with interest on the "public debt" shows that Mr. Stengel is no constitutional scholar. John Berlau shoots down such nonsense:
Progressive constitutionalists argue that the term "public debt" embraces every transfer payment of every spending program under the sun. But the Supreme Court has already shot down the argument that government benefits -- even if they are labeled "entitlements" -- represent contractual obligations. In Flemming v. Nestor, 363 U.S. 603 (1960), the court ruled that a deported member of the Communist party did not have any "earned rights" to his Social Security benefits, and neither did other recipients. Calling benefits a "noncontractual interest," the Court declared, "To engraft upon the Social Security system a concept of 'accrued property rights' would deprive it of the flexibility and boldness in adjustment to ever-changing conditions which it demands."
Senate Minority Leader Mitch McConnell has floated a debt-ceiling proposal that has conservatives both defending and attacking it. McConnell's an honorable man, but I'm a mite leery about his proposal. That's because it gives a lot of discretion to the most fiscally irresponsible president in history. I'm more swayed by Marc Thiessen of the American Enterprise Institute, who writes:
Here is a real contingency plan: If President Obama and congressional Democrats won't agree on deep spending cuts in exchange for a debt limit increase by August 2, House Republicans should simply pass a small, temporary debt-ceiling increase -- and attach some of the spending cuts Democrats have already agreed to in the course of the debt-limit negotiations. If that stop-gap increase runs out without an agreement, they can do it again ... and again ... and again. The government does not default. Social Security recipients get their checks. And we begin implementing spending cuts.
This compelling idea was echoed on Sean Hannity's show on Fox News this week by former Speaker Gingrich (video and transcript here). Here's what he said:
GINGRICH: I think the House Republicans should call President Obama's bluff. President Obama said today that he couldn't guarantee that Social Security checks would be paid on August 2nd or August 3rd.
The House Republicans ought to go in tomorrow or the next day, pass a $100 billion cut in spending and a $100 billion increase in the debt ceiling so it is exactly balanced. That takes us all the way through to September. They should call that the Social Security payment guarantee bill.
Then they should say to the president, here we've taken care of August. All you have to do is get Harry Reid and the Senate Democrats to pass it. You sign it. We can guarantee every senior citizen their Social Security check. Now, Mr. President, are you prepared to stop senior citizens from getting their check?
Put the shoe back on his foot. Make him responsible. You can do that once a month for the next 18 months.
Precisely, Mr. Speaker, and keep the issue of debt before the American people until they understand what the government is doing to them.
Unfortunately, we need to raise the debt ceiling. Douglas Holtz-Eakin, former director of the Congressional Budget Office, made that quite clear on The Kudlow Report Thursday night. But it's not because of the possibility of default that we must yet again go to the well. Rather, it's because current revenue only pays for 60 percent of the government, and Congress isn't going to cut 40 percent of the federal government before August 2.
Williamson, Thiessen and Gingrich (and perhaps McConnell, too) all have worthy ideas for dealing with the reckless, spendaholic Democrats in the White House and the Senate. But the Tea Party will have to wait for the 2012 election to get real reform.
Jon N. Hall is a programmer/analyst from Kansas City.