Friday, July 08, 2011

Bruce Bartlett Connects the Dots-- It's the National Security, Stupid


People think the current threat of default concerns whether Social Security checks will be mailed a week late, and whether the Washington Monument will be closed for a couple weeks. They are wrong.

Today we are facing more than a fiscal crisis. We are facing a long-term national security crisis.

American government debt has long been viewed as rock solid and essentially risk free. That is why foreign investors, especially in China, have been willing to allow us to spend freely. If they come to believe that we are incapable of paying our debts because our government is not run by adults, they will not be willing to fund our huge investments in national defense-- including the three wars we are currently fighting, our investments in weaponry, and our anti-terrorism programs-- at their current low interest rates.

We rely on foreign governments and foreign investors to finance our national defense. That is why we have been able to maintain an enormous defense budget at a far lower interest cost than other countries would face. But once American debt is seen as risky, foreign investors will find American debt to be a much less secure proposition, and they will demand higher interest rates in compensation. That will increase the costs of defending the country significantly in the short run, and the increase in interest rates may remain for years to come. That is the long-term problem created by the short-term crisis.

There are two important discussions in the debt ceiling debate today. One is Larry Tribe's New York Times op-ed, which calmly reiterates (1) that Congress, not the President is entrusted with the power to issue debt, (2) that in and of itself the debt ceiling by itself is not unconstitutional under section 4, and (3) that the President's power is at its lowest ebb because Congress has specifically refused to raise the debt ceiling. On these three points, he and I agree.

Tribe, however, does not discuss the elephant in the room: He knows as well as I that Republicans in Congress are openly threatening to drive the United States into default. Senator Jim DeMint of South Carolina has blithely announced that he is willing to cause "serious disruptions" to the U.S. economy in order to get his way:
“What I'm advocating here is, let's use this as a point of leverage, give the president an increase, but don't come away without real cuts from real caps and spending, and without a balanced budget,” DeMint said on FOX Business Network.

“We're at the point where there would have to be some, you know, some serious disruptions in order not to raise [the debt ceiling],” he said. “I'm willing to do that.”
The legislative history of section 4 of the Fourteenth Amendment shows that this sort of threat is precisely what the framers wished to make unconstitutional. They were worried that future Senators from South Carolina-- and other southern states--would try to hold the federal government hostage in order to undermine Reconstruction. Whether Senator DeMint knows it or not, he is channeling his rebel predecessors. And lest there be any doubt about this point, this is not something to be proud of.

Congress has a constitutional duty under the Fourteenth Amendment not to drive the U.S. economy over a cliff to satisfy a political agenda: therefore it has a duty to raise the debt ceiling if this is necessary to avoid default. Tribe does not focus on this issue; the closest he comes is in the final line of his op-ed: "Only political courage and compromise, coupled with adherence to traditions that call upon Congress to fulfill its unique constitutional duty, can avert an impending crisis." True enough, but the "unique constitutional duty" is the duty created by section 4 of the Fourteenth Amendment.

But the real eye opener, and, in my view today's must-read, is Bruce Bartlett's testimony before the Democratic Steering and Policy Committee of the House of Representatives. Bartlett offers a sobering account of why the U.S. economy, and the world economy, are teetering on the brink of collapse due to the radical ideology of portions of the Republican Party, egged on by radical economists who have been urging the U.S. to default on its obligations for some time.

Bartlett takes head-on the hopeful strategy of letting the President prioritize payments to stem default. He points out that this strategy may be very difficult to realize in practice:

I think those who believe the Treasury can easily avoid a default by prioritizing its payments – which it already has the authority to do under a 1985 General Accounting Office opinion – don't understand how variable its cash flow is. Inflow almost never matches outflow on a daily or even monthly basis. And, as the Morgan Stanley report notes, it is simply not tenable for the Treasury to withhold Social Security payments to make interest payments that may not be due for weeks.

Furthermore, as we move closer to the end of the fiscal year, which ends on September 30, the Treasury loses flexibility because the Congressional Budget and Impoundment Control Act of 1974 requires that all fiscal year appropriations be paid within that year unless rescinded. The president has no authority to withhold payments past the end of the fiscal year except in the case of multi-year appropriations for some capital projects. In any case, delaying payments to those supplying goods and services to the federal government would cause great hardship and undoubtedly increase costs in the future.

Finally, on Social Security, I have heard it said that the payment of benefits is never a problem as long as there are sufficient assets in the Social Security trust fund to pay them. The problem is that the Treasury securities in the trust fund are not marketable. If the Treasury lacks the cash to redeem the securities itself there is no practical way of obtaining the cash to pay benefits in the event that the debt limit becomes severely binding. That is why back in 1996 Treasury insisted that Congress raise the debt limit sufficiently to cover Social Security benefits or benefits due on March 1 could not be paid. Of course, Congress did so.

Perhaps the most important part of Bartlett's testimony, however, is his discussion of the threat to national security:
In Federalist No. 30, Alexander Hamilton warned that failure to ensure the integrity of our national debt would severely threaten the nation‟s ability to defend itself. As he wrote: "In the modern system of war, nations the most wealthy are obliged to have recourse to large loans…. But who would lend to a government that prefaced its overtures for borrowing by an act which demonstrated that no reliance could be placed on the steadiness of its measures for paying? The loans it might be able to procure would be as limited in their extent as burdensome in their conditions. They would be made upon the same principles that usurers commonly lend to bankrupt and fraudulent debtors, with a sparing hand and at enormous premiums."

This is why our national security officials have been warning for some time that the debt is a national security problem. Last year, Secretary of State Clinton had this to say: "I think that our rising debt levels poses a national security threat, and it poses a national security threat in two ways. It undermines our capacity to act in our own interests and it does constrain us where constraint may be undesirable. And it also sends a message of weakness internationally. I mean, it is very troubling to me that we are losing the ability not only to chart our own destiny, but to have the leverage that comes from this enormously effective economic engine that has powered American values and interests over so many years."

And just a few weeks ago, Admiral Mike Mullen, chairman of the Joint Chiefs of Staff, said that the national debt is “the single biggest threat to our national security.”

Their concerns are clearly justified because foreigners necessarily gain some measure of control over us and limit our options by virtue of their ownership of large quantities of Treasury securities. As of April 29, foreigners held $4.5 trillion of Treasury securities, 47 percent of the total debt held by the public. China alone holds at least $1.15 trillion. Not surprisingly, Chinese officials have expressed great concern over a debt default, no matter how brief, saying publicly that it would lead to a fall in the dollar.
Bartlett adds a sobering example from a J.P. Morgan report in April: Fannie Mae and Freddie Mac were placed in government conservatorship during the last fiscal crisis in 2008; "even without any kind of default, Fannie Mae and Freddie Mac's move into conservatorship has led to permanently lower foreign sponsorship of GSE debt." Imagine the effects on the government's ability to raise money from foreign sources if the U.S. government itself went into default. Indeed, the J.P. Morgan report, entitled "The Domino Effect of a US Treasury Technical Default," describes exactly what its title suggests: "any delay in making a coupon or principal payment by the Treasury— even for a very short period of time—would almost certainly have large systemic effects with long-term adverse consequences for Treasury finances and the US economy."

Congressional Republicans no doubt would agree that ensuring a strong defense is one of the federal government's most important obligations: that is one reason why they want to put our financial house in order. What they may fail to recognize is that threatening default on the government's debts also threatens to undermine our defense capacity, and does so even more directly--and a genuine default would cripple not only the social programs that Republicans would like to shrink but also our military and intelligence capacities for many years to come.

The Republican strategy of making America strong by bringing the American government to its knees is self-defeating.

Previously I noted that the constitutional structure of the debt crisis is very similar to the constitutional structure of the debate over the President's war powers. Bartlett's testimony helps us see why that is so: At the founding the federal government was given broad powers to tax and spend for the General Welfare in large part to meet national security needs. The framers feared that a government unable to meet its financial obligations would be unable to meet its national security obligations as well. In the crisis over the debt ceiling, we see the wisdom of their judgments in a new way.

Read other posts on the debt ceiling crisis