Whenever the establishment left and right agrees on something, expect a big assault on our democracy. That is the case with the emerging consensus that the debt ceiling should be dumped—for two years at least—in any deal that replaces House Speaker John Boehner’s ill-fated Plan B so that spending hawks can’t later hold the economy hostage to extract cuts. But there are few external market checks on America’s profligacy. Without strong internal political checks, it might well spend itself into oblivion.
America’s total $16 trillion accumulated debt represents 100 percent of the GDP. Add in its $85-plus trillion in unfunded pension and health care liabilities and the debt shoots up to 550 percent—only marginally better than France. Every man, woman and child in America is currently on the hook for $190,000.
But the Obama administration obviously doesn’t give a hoot. Otherwise, its plan to avert the fiscal cliff would have included serious spending cuts and entitlement reform, not primarily a scheme to raise taxes on households making over $250,000 which would at best raise about $40 billion per year—around what Washington borrows every week.
As if that were not outrageous enough, the administration also demanded in its fiscal cliff package that Congress forever forfeit its constitutionally given debt authority. (This authority was already considerably weakened during World War I. At that time, Congress gave up its authority to approve debt issuance for specific projects. It started pre-approving instead a lump sum loan amount so that the president could raise money quickly to fund the war effort.) House Speaker John Boehner (appropriately) laughed at Obama’s suggestion at first. However, later he whispered in the president’s ear that he would be willing to lift the ceiling, which will expire in February, for a year if he went along with his Plan B. But with the collapse of that plan, it is likely that Obama will try and write in a two-year extension in whatever deal he works out with Congress now—and take away the only tool that Republicans have to enforce any spending discipline.
And in this he might get the help not just of liberals—but smart-set conservatives too.
Liberals have been railing against the ceiling ever since fiscal hawks used it to create a spending showdown last year. They argue that separating the budgeting and the borrowing functions of Congress means that Congress can authorize spending but then refuse to sanction the means to pay for it. “The idea that the Congress gets to vote twice on whether to pay for [expenditures] it has appropriated is crazy,” insists Bill Clinton. Liberals want America to follow other developed countries where legislators are required to approve new borrowing as part of the budgetary process.
What they ignore is that many of these countries have hard limits on debt issuance as part of the budgetary process—kind of like a Balanced Budget Amendment, which liberals resolutely oppose. For example, Germany has a constitutional amendment that requires that structural deficits not exceed 0.35 percent of GDP.
What’s more, that’s effectively how things worked in America until Democrats decided three years ago that passing budgets was a dispensable nicety and started authorizing spending through ad hoc resolutions. This meant they did not need to negotiate or set spending priorities to get a majority buy-in, a process that made raising the borrowing limit a fait accompli. But eliminating the ceiling in the absence of budgets is tantamount to giving Democrats a blank check and then gagging opponents from raising questions.
But liberals aren’t the only ones questioning the debt ceiling. Writing for the American, a magazine of the conservative American Enterprise Institute, Steve Conover notes that the possibility of America defaulting undermines investor confidence in America’s sovereign debt instruments, something that could raise borrowing costs and hurt growth.
That strains credulity.
For starters, not raising the borrowing limit doesn’t mean default. America’s annual debt service costs are only about 10 percent of federal revenues, which means that the country can easily pay investors, meet its obligations to its retirees (for now) and still have money left. It would certainly mean cutting spending somewhere, but that’s a prospect to be cheered, not lamented.
Furthermore, America has experienced an epic financial meltdown, sluggish growth and is up to its eyeballs in debt and credit markets are still offering it loans at effectively zero percent interest rates. It makes no sense that a little budget fight to put America on sounder fiscal footing would cause them to significantly jack up these rates.
But one reason credit markets have ignored America’s spending addiction is that, with Europe on the verge of meltdown, they have nowhere else to go. More importantly, the dollar’s status as a reserve currency makes it much easier for America to issue debt without fearing commensurate interest hikes. In other words, America’s superpower status has created an incentive for fiscal irresponsibility.
Even if a debt-ceiling showdown causes some rate hikes, catastrophe wouldn’t follow. The resulting budgetary strain might well prod legislators to deal with the deficit now—forestalling a far uglier reckoning down the road.
Great powers fall not due to external threats but their own avarice. The existence of the debt ceiling suggests that America is aware of this. Republicans should yield as little as possible on this crucial tool. Cavalierly bargaining it away will be a terrible sign.
http://online.wsj.com/article/SB10001424127887324081704578232080227662110.html
Rivkin and Casey: The Myth of Government Default
The Constitution commands that public debts be repaid. There is no such obligation to fund entitlement programs.
By DAVID B. RIVKIN JR.
AND LEE A. CASEY
Three false arguments, pushed hard by the Obama administration and accepted on faith by the media and much of the political establishment, must be laid to rest if the American people are to understand the issues at stake in the federal "debt ceiling" debate.
The first is that Congress's failure to raise the debt ceiling—the amount of money the federal government is authorized to borrow at any given time—will cause a default on the national debt. The second is that federal entitlement programs are constitutionally protected from spending cuts. The third is that the president can raise the debt ceiling on his own authority.
To take up the first canard: Contrary to White House claims, Congress's refusal to permit new borrowing by raising the debt ceiling limit will not trigger a default on America's outstanding public debt, with calamitous consequences for our credit rating and the world's financial system. Section 4 of the 14th Amendment provides that "the validity of the public debt of the United States, authorized by law . . . shall not be questioned"; this prevents Congress from repudiating the federal government's lawfully incurred debts.
The original concern of this provision was to guarantee the integrity of federal debts incurred during and immediately after the Civil War (while the debts of the Confederacy were nullified permanently), and to ensure that a newly "reconstructed" Congress—to which the Southern states were readmitted—would not reverse these decisions. However, the amendment's language was not limited to the Civil War-related debts. In Perry v. United States (1935), the Supreme Court made clear that the provision "indicates a broader connotation" protecting the nation's debts as a whole.
This means that a failure to raise the debt ceiling—to prevent new borrowing—does not and cannot put America's current creditors at risk. So long as this government exists, and barring a further constitutional amendment, those creditors must be paid.
Nor are they at risk in practice, since the federal government's roughly $200 billion in tax revenue per month is more than sufficient to service existing debts. If the executive chose to act irresponsibly and unconstitutionally and failed to make any debt payments when they come due, debt-holders would be able to go to the Court of Federal Claims and promptly obtain a money judgment.
These basic facts should inform any credible decisions by credit-rating agencies in establishing the government's creditworthiness. Significantly, these agencies have traditionally acted favorably when heavily indebted countries have not defaulted on their debt but cut deeply their public spending.
Second, despite White House claims that Congress must raise the debt ceiling to pay the bills it has incurred, the obligations protected as "debts" by the 14th Amendment do not include entitlement programs such as Medicare and Social Security. These programs are not part of the "public debt," which consist of loans that are made to the federal government through bonds and similar financial instruments. Entitlement programs are instead political measures that are fully subject to the general rule that one Congress cannot, by simple legislation, prevent a future Congress from making cuts.
This fundamental and vital distinction is clear from both the text and the drafting history of the 14th Amendment's Section 4. The wording of the section was revised before its enactment and ratification to replace the term federal "obligations" with that of "debts," a far more narrow (and manageable) category.
The distinction was recognized by the Supreme Court in Flemming v. Nestor (1960), which involved the power of Congress to modify Social Security benefits. The court noted that entitlements and "contractual arrangements, including those to which a sovereign itself is a party, remain subject to subsequent legislation by the sovereign."
Congress can reduce a wide range of payments to various beneficiaries at any time by amending the statutes that authorize them or simply by failing to appropriate sufficient funds to pay for them. Nor does Congress have any legal or constitutional obligation to borrow money to pay for entitlements.
Third, assertions, most recently made by Nancy Pelosi, that the president can rely on Section 4 as a pretext for raising the debt ceiling by himself are manifestly incorrect and constitutionally dangerous. Section 4 grants no power whatsoever to the president—instead, the 14th Amendment grants Congress the "power to enforce, by appropriate legislation, the provisions of this article."
More fundamentally, this argument—which has been tentatively advanced and then tentatively withdrawn by the White House, both during the 2011 debt-ceiling battle and in the last several weeks—is contrary to the language, structure and history of the Constitution.
Like the British Parliament before it, Congress controls the power of the purse—the authority to raise taxes, borrow money and direct how revenues are spent. In particular, Article I, Section 2, grants to Congress the power "to borrow money on the credit of the United States." There is no similar grant to the president. Any effort by the chief executive to borrow money without congressional action would be every bit as injurious to our constitutional system as presidentially ordered taxation.
True enough, the "debt ceiling" is not a constitutional requirement. Congress could choose instead—as used to be the case during most of our history—to vote separately on the issuance of each federal debt instrument. However, nowhere in the Constitution is the president authorized to borrow or spend money without congressional action, except insofar Congress itself may permit.
Once these false arguments are cleared away, the real issue in the debt-ceiling debate becomes clear: the proper level of federal spending. Should Congress fail to increase the debt ceiling as much as the president wants, the effective result would be major government spending cuts, with payments on public debt excluded.
This is tough medicine and not to be administered lightly. If Republicans are serious about winning this debate, they must strive to convince the American people that such spending cuts are necessary, given President Obama's openly articulated unwillingness to implement any meaningful spending cuts other than defense and his clear preference for limitless borrowing.
Whether they can succeed in this task is unclear. But the public must at least be allowed to ponder these vital issues without being misled by false claims involving debt default, the nature of federal obligations, and which branch of government is in charge of the public fisc.
Messrs. Rivkin and Casey are partners in the Washington, D.C., office of Baker Hostetler LLP and served in the White House and Justice Department during the Ronald Reagan and George H.W. Bush administrations.
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