Thursday, September 07, 2017

The Debt Ceiling Charade


Many Americans who don't understand the appropriations process misunderstand how the debt ceiling works. They assume that Congress passes a law that authorizes the Treasury to borrow up to a certain amount, and that when this amount is passed, Congress passes another law that authorizes the Treasury to borrow up to a certain larger amount, and so on. They assume, in other words that the debt ceiling is what gives the Treasury the power to borrow, and that without the debt ceiling, the Treasury couldn't borrow anything at all.

That's not how it works, and understanding the process shows why the debt ceiling is a charade. For most of the past four years, the debt ceiling statute has been suspended-- not legally in force. At certain moments, it reappears like a ghoul, only to be cast away once again by Congress, which suspends it for yet another amount of time.

When the debt ceiling is suspended, which is most of the time, the Treasury Department can borrow as much as it likes, as long as it does so to pay debts already appropriated by law (that is, legislation passed by Congress and signed by the President). When Congress passes a new suspension, it acknowledges of all of the debt issued during the period of the suspension, adds the amount to the ceiling, and the process repeats itself.

The whole idea of a debt ceiling that somehow constrains federal spending is a farce. It is a farce for two reasons.

First, the debt ceiling doesn't limit appropriations-- the amount of money that Congress agrees to spend by law. It only limits the ability to issue treasury bonds and notes. If the Treasury can borrow or obtain money to pay the nation's debts in other ways, the debt ceiling doesn't apply.

Second, the debt ceiling isn't actually a ceiling, because it has been suspended for most of the past four years. When it snaps back into operation, the Treasury uses "extraordinary measures" to pay the country's debts.

During the months when the debt ceiling is not suspended, its only purpose is to allow hostage taking by ambitious politicians who want to risk crashing the nation's economy in order to score political points. At all other times, the debt ceiling is of no legal effect because it is suspended by law, and the suspension acknowledges the legitimacy of all debt borrowed during the time of the last suspension.

Rinse and repeat.

This is no way to run a country's fiscal policy. It is a charade, a farce, and a disgrace.

So when politicians talk about "raising" the debt ceiling, they are not telling you the whole truth. Congress has found it much more convenient to suspend the debt ceiling-- that is make it legally ineffective--than to actually raise the ceiling to a specific amount.

When people talk about how important the debt ceiling is to the constitutional power to appropriate money, they are lying through their teeth.

All of which leads to the question: if Congress keeps suspending the debt ceiling, why shouldn't it just suspend the debt ceiling indefinitely, which, in effect, is to repeal it.

Want to know more?  Here are the details.

The Treasury exercises the nation's constitutional power to borrow on the credit of the United States by issuing notes, bonds, and other instruments. The power to do this is provided in a series of statutes in Title 31, sections 3102 to 3111. These statutes give the Treasury the power to borrow as much as it needs to pay the debts of the United States.

A separate statute, section 3101(b), is the "debt ceiling." The current statute reads as follows:

(b) The face amount of obligations issued under this chapter and the face amount of obligations whose principal and interest are guaranteed by the United States Government (except guaranteed obligations held by the Secretary of the Treasury) may not be more than $14,294,000,000,000, outstanding at one time, subject to changes periodically made in that amount as provided by law through the congressional budget process described in Rule XLIX of the Rules of the House of Representatives or as provided by section 3101A or otherwise.

Note that this statute is not the source of the Treasury's power to borrow money and pay debt. It merely limits the power to issue bonds and notes to pay debts already incurred. Even without section 3101(b), the Treasury has full legal power to borrow on the credit of the United States and pay money for lawful appropriations passed by Congress and signed by the President.

I repeat: the debt ceiling is not the source of the Treasury's power to borrow money and pay the nation's debts. It has independent statutory power to do these things.

So what does it mean to "raise the debt ceiling." You might think that when you raise the debt ceiling, you just increase the amount from 14 trillion to a specific new number.

That used to be the way it worked. But that's not how it has worked since 2011.

The Debt Ceiling crisis of 2011 led to the Budget Control Act of 2011. It created an elaborate scheme that, in effect, allowed the President to raise the debt ceiling unless Congress objected. This scheme is still codified at Section 3101A. In 2013, Congress adopted a similar measure to allow President Obama once again to raise the debt ceiling.

Since then, Congress has not specified a new amount to replace the 14 trillion number specified in 3101(b). Instead Congress has passed a series of bills suspending the debt ceiling statue for certain periods of time and using a formula to incorporate the amount of all debt issued during the suspensions.

The decision to go with suspensions rather than a fixed amount was made by the Republicans who controlled the House and Senate for their own political convenience. Recently, Paul Ryan and Mitch McConnell proposed that Congress suspend the debt ceiling for 18 months, past the 2018 elections. Instead President Trump agreed to suspend it for only three months.

Why did Congress switch to suspensions? Very simple. If you specify an amount, you can't always predict when the Treasury will reach the limit. On the other hand, if you suspend the ceiling to a certain specified time in the future, the Treasury can borrow whatever is necessary to pay the nation's bills, and Congress knows in advance when it will have to take up the issue once again.

Then, when Congress passes a new debt ceiling suspension, it just announces that the amount of all debt issued during the suspension should be added to whatever the debt ceiling was the last time the debt ceiling was suspended. In this way, Congress never has to specify a new number.

During the period in which the debt ceiling temporarily springs back to life, Congress either authorizes the President to borrow as much as he needs (as it did in 2011 and 2013) or the Treasury department uses "extraordinary measures" to pay the nation's bills.

On February 4, 2013, Congress suspended the debt limit until May 18, 2013. On October 17, 2013, it gave the President power to raise the debt limit by himself. On February 14, 2014, Congress suspended the debt limit until March 15, 2015. Then, on November 2, 2015, Congress suspended the debt limit to March 15, 2017. Since March, the Treasury Department has been using "extraordinary measures."

The latest proposed suspension passed the Senate today. It suspends section 3101(b) until December 8, 2017. It reads as follows:


       Sec. 101. (a) In General.--Section 3101(b) of title 31,
     United States Code, shall not apply for the period beginning
     on the date of enactment of this Act and ending on December 8, 2017.
       (b) Special Rule Relating to Obligations Issued During
     Extension Period.--Effective on December 9, 2017, the
     limitation in effect under section 3101(b) of title 31,
     United States Code, shall be increased to the extent that--
       (1) the face amount of obligations issued under chapter 31
     of such title and the face amount of obligations whose
     principal and interest are guaranteed by the United States
     Government (except guaranteed obligations held by the
     Secretary of the Treasury) outstanding on December 9, 2017,
       (2) the face amount of such obligations outstanding on the
     date of the enactment of this Act.
       (c) Restoring Congressional Authority Over the National
     Debt. (1) Extension limited to necessary obligations.--An
     obligation shall not be taken into account under section
     101(a) unless the issuance of such obligation was necessary
     to fund a commitment incurred pursuant to law by the Federal
     Government that required payment before December 9, 2017.
       (2) Prohibition on creation of cash reserve during
     extension period.--The Secretary of the Treasury shall not
     issue obligations during the period specified in section
     101(a) for the purpose of increasing the cash balance above
     normal operating balances in anticipation of the expiration
     of such period.
Note how this bill works: It suspends the debt ceiling and it adds the amount of debt added since the last suspension to the total amount, without specifying the actual number.

If you thought that the debt ceiling had any effect on limiting, borrowing and spending by the United States government, I have a bridge to sell you. That is not how it works.

So what good is the debt ceiling? Well, the only people who use it are politicians who want to hold the United States hostage and threaten to crash the world economy. It has no other function at this point.

It is not surprising, therefore that Ryan and McConnell wanted to suspend the debt ceiling for 18 months. They want to hold at bay the crazy people in their own party for as long as possible, and push the debt ceiling talks off until after the 2018 election.

Thus, even the Republican leadership which fomented the Debt Ceiling Crises of 2011 and 2013 now sees the debt ceiling as a useless appendage-- a dangerous nuisance employed only by hostage takers. If they've come around, is there any reason to keep it?

No, there is not.

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