Will a failure to raise the US debt ceiling force a default?

[mheslep]

As it happens the legislative branches of the US government have long established a periodic legal limit on the Treasury's ability to raise revenue by issuing debt. I'm told such a limit is somewhat unusual as nations go, but there we are. This year the US Treasury predicts that the current legal ceiling could be reached as early as March 31, forcing a vote on the matter soon. Recently, Secretary of the Treasury Geithner http://www.treasury.gov/connect/blog/Pages/letter.aspx" to impress upon that body his opinion of the consequences of a failure to raise the debt limit yet again. The letter was no doubt prompted by the greater than usual clamoring from Senators and Congress persons who have voiced serious reservations about raising the debt limit this time, especially from Tea Party connected freshmen[1]; their reservations in turn prompted by the debt increase over the last decade, and now dramatic increase debt and spending in the last two years. The fact that formerly Senator Obama voted in 2006 against raising the debt limit (then $9 trillion, now asking for $14.3 trillion) and losing only 48-52, gives today's Senators more political maneuvering room.[2][3]

Any number of threads could be opened on the various consequences of this issue, many already have been. I'd like to confine this one to a particular one of Geithner's predictions that the Treasury would be forced to default on legal obligations of the United States . After a quick look at the budget numbers it is not clear to me that this must be so:

Revenue: $2.2T
Spending: $3.5T
Deficit: $1.3T​

That is, federal government takes in less than $200B per month via taxes. However, the interest on the debt is less than http://en.wikipedia.org/wiki/File:U.S._Federal_Spending_-_FY_2007.png" per month. So while the Treasury and the US Government would have to immediately find some ~$100B/month in cuts given a freeze in the debt ceiling, the Treasury need only default on debt if it chooses to do so: continue to eat out and blow off the last notice from the creditor, or stay in and eat mac and cheese.

[1] Senator Rand Paul (Ky) today. http://thehill.com/blogs/blog-brief...-ceiling-vote-tied-to-ironclad-rule-on-budget

"I can't imagine voting to raise the debt ceiling unless we're going to change our ways in Washington," Paul said during an appearance on Fox News Sunday. "I am proposing that we link to raising the debt ceiling -- that we link a balanced budget rule, an ironclad rule that they can't evade."

Paul said attaching "token spending cuts" to the debt ceiling measure wouldn't be enough to win his vote.

[2] http://blogs.abcnews.com/politicalpunch/2011/01/senator-obamas-vote-against-raising-the-debt-ceiling-and-the-assassination-of-salman-taseer-todays-q.html
[3] From Senator Obama's floor 2006 speech. http://rpc.senate.gov/public/_files/alternativestothedebtlimitincreasev20.pdf

The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies. … Increasing America’s debt weakens us domestically and internationally. Leadership means that “the buck stops here.” Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better.

 

[WhoWee]

I think the Republican should negotiate a short term extension of 2 to 3 months. The initial agreement could structure an outline of spending cuts and monitoring by the CBO. At each 60 - 90 day renewal meeting, progress can be verified and additional cuts enacted. It's the only way to force responsible behavior and get everyone onto the same page.

 

[mheslep]

I think the Republican should negotiate a short term extension of 2 to 3 months. The initial agreement could structure an outline of spending cuts and monitoring by the CBO. At each 60 - 90 day renewal meeting, progress can be verified and additional cuts enacted. It's the only way to force responsible behavior and get everyone onto the same page.

Before we get into what might be done, I'd like to establish what will happen regards existing debt payments, i.e. everybody's T-Bills, should nothing be done.

 

[WhoWee]

Before we get into what might be done, I'd like to establish what will happen regards existing debt payments, i.e. everybody's T-Bills, should nothing be done.

Maybe they can start handing out shares of GM and land titles - lot's of Government owned real estate - but mineral rights might be a little tricky.

I'm glad you posted about Obama's record on this issue. It's time to force him to the table and get serious - ask him who should not be paid?

To directly answer your question, my guess is those are annualized numbers? Increased (not sure this year will be ?) January - April collections MIGHT buy them a few weeks time? As far as I know, cuts or default would be the ONLY options. Accruals, renegotiation of the timing of payment, printing money, holding back tax refunds and EITC payments, and any other clever cash management tricks would still realize an increase in debt.

 

[Vanadium 50]

Fundamentally, the problem is that Congress has passed mutually contradictory laws. Taxes are this much, spending is that much, and the debt ceiling is a third number: and it doesn't add up.

Traditionally, the solution is for it to go to the courts. There are two possibilities I consider likely. One is that the courts decide that the last bill passed supersedes the previous ones, which effectively removes the debt ceiling. The other is to order the executive branch to follow some court-mandated budget.

 

[Al68]

Of course failure to raise the debt ceiling doesn't automatically cause default. It causes government to choose between honoring its debt and spending on other things.

Personally, I think it's disgusting to talk about this as if it were a mere formality, and there is no option but to raise the debt ceiling. It's not like limiting government spending to the obscenely high amount it takes in is not an option.

 

[Vanadium 50]

It's not like limiting government spending to the obscenely high amount it takes in is not an option.

Yes, but that was an option considered and rejected by the 111th Congress. And now that they have rejected it, a very good question is "What will happen".

 

[mheslep]

Refusal to raise the debt ceiling would cut spending but it would be a disastrous way to do so, a complete (long term) failure of the legislative branch. This would not be same as as the controlled government shutdown in the 1990's, where some parks closed and some government employees remained home. Without some kind of minimal legal fiat as to what to spend on, anything can happen: no military paychecks, no FBI paychecks, no Social Security paychecks, and yes the Treasury might choose to default on debt payments. All that could happen, absent Congress legally choosing some percentage, and where, to cut.

Still I'm not so sure we can waive away Sec. Geithner's assertion that a default would be forced, perhaps we're missing something.

 

[WhoWee]

Refusal to raise the debt ceiling would cut spending but it would be a disastrous way to do so, a complete (long term) failure of the legislative branch. This would not be same as as the controlled government shutdown in the 1990's, where some parks closed and some government employees remained home. Without some kind of minimal legal fiat as to what to spend on, anything can happen: no military paychecks, no FBI paychecks, no Social Security paychecks, and yes the Treasury might choose to default on debt payments. All that could happen, absent Congress legally choosing some percentage, and where, to cut.

Still I'm not so sure we can waive away Sec. Geithner's assertion that a default would be forced, perhaps we're missing something.

Has anyone found a legally mandated priority of payments list?

 

[Al68]

Refusal to raise the debt ceiling would cut spending but it would be a disastrous way to do so, a complete (long term) failure of the legislative branch. This would not be same as as the controlled government shutdown in the 1990's, where some parks closed and some government employees remained home. Without some kind of minimal legal fiat as to what to spend on, anything can happen: no military paychecks, no FBI paychecks, no Social Security paychecks, and yes the Treasury might choose to default on debt payments. All that could happen, absent Congress legally choosing some percentage, and where, to cut.

That's a good point, failure to raise the debt ceiling would force spending cuts, but the President would have complete power over the details, since congress has effectively authorized all the individual spending items, and the debt ceiling only applies to the total.

And he could choose to spend revenues on other things, if he decides they are more important than honoring legal debts of the U.S.

 

[mheslep]

Has anyone found a legally mandated priority of payments list?

There you go, if such a thing already existed it could force debt defaults.

 

[WhoWee]

There you go, if such a thing already existed it could force debt defaults.

I would assume national defense spending would be the primary category protected - followed by (low risk) secured Government obligations.

 

[mheslep]

Essay http://online.wsj.com/article/SB100...089963912388314.html?mod=WSJ_Opinion_LEADTop"by Senator Pat Toomey. Doing the math shows that a debt default is not inevitable from a debt ceiling cap.

In fact, if Congress refuses to raise the debt ceiling, the federal government will still have far more than enough money to fully service our debt. Next year, for instance, about 6.5% of all projected federal government expenditures will go to interest on our debt, and tax revenue is projected to cover about 67% of all government expenditures. With roughly 10 times more income than needed to honor our debt obligations, why would we ever default?

But theoretically with no legal direction as to where to spend revenue a default is possible, therefore:

To make absolutely sure, I intend to introduce legislation that would require the Treasury to make interest payments on our debt its first priority in the event that the debt ceiling is not raised. This would not only ensure the continued confidence of investors at home and abroad, but would enable us to have an honest debate about the consequences of our eventual decision about the debt ceiling.

Just as discussed up thread. Clearly the Senator reads PF. :tongue:

 

[WhoWee]

Just as discussed up thread. Clearly the Senator reads PF.

well done

 

[talk2glenn]

Has anyone found a legally mandated priority of payments list?

By definition, the entitlements are legally required (mandatory) expenditures, and would have to be paid first. Interest payments and discretionary spending follows.

The problem is, entitlement spending makes up the lions share of government outlays. You could say that virtually the entire Federal Government (its employees, agencies, departments, etc), including defense and law enforcements, are paid for by borrowing, with all of its tax revenues going to pay for the mandatory programs (handouts and entitlements).

So, if the Treasury couldn't borrow, you'd effectively have to shut the Federal government down - there wouldn't be enough money left over to fund discretionary programs after the entitlements and interest was paid for.

This is the problem Republicans face. There are short-term mechanisms to avert a crisis. You could avoid a government shutdown by funding its operations today, and deferring mandatory payments until the absolute deadline (sort of like putting off paying a credit card until the due date), but this doesn't change the calculus, it only makes the game of chicken last longer.

 

[mheslep]

From everything I've read regarding the term mandatory in reference to budgetary spending, it refers only to political priorities and the long length of time surrounding the entitlements. But of course everything the congress appropriates and the President signs becomes a matter of law. That is, paying an FBI agent or buying a Destroyer is every bit as legally required as is mailing out a social security check. The question then is does Congress have any specific priority list in place should funding, taxes or borrowed, be inadequate? The answer seems to be no, given Senator Toomey's explanation for his pending legislation doing exactly that for debt interest payments.

 

[CAC1001]

I think the Republicans will raise the debt ceiling at the end. Some commentators have suggested what WhoWee said, that the Republicans ask for sizeable, but reasonable, spending cuts, and if only small cuts are offered, only raise the debt ceiling for a few months, so then we have the discussion all over again. If reasonable cuts are given, extend it out longer.

 

[Al68]

By definition, the entitlements are legally required (mandatory) expenditures, and would have to be paid first. Interest payments and discretionary spending follows.

Entitlements are only "required" in the sense that they have been appropriated by congress, and failure to pay entitlements isn't a default on any legal contract.

Entitlements are not legal debts of government.

Interest payments are contractually owed, obligations of government as an entity, not just an internal agreement within government (like entitlements).

 

[Al68]

I think the Republicans will raise the debt ceiling at the end. Some commentators have suggested what WhoWee said, that the Republicans ask for sizeable, but reasonable, spending cuts, and if only small cuts are offered, only raise the debt ceiling for a few months, so then we have the discussion all over again. If reasonable cuts are given, extend it out longer.

The problem there is that one person's "reasonable" is another person's "draconian". Even increases in spending in excess of inflation have been referred to as "draconian cuts", because the increases were not large enough for some.

That's exactly why Republicans should fix this completely in the next two years. Meaning reducing spending to below the grotesque amount of revenues received as a decent start.

Democrats are at a huge disadvantage: Nothing they might say could possibly be any worse than what they will say regardless. That's the price they pay for their habit of extreme hyperbole.

No matter what they do, Republicans will have to try to get re-elected in 2012 with Democrats bashing them. They have nothing to lose by doing the right thing.

 

[talk2glenn]

Entitlements are only "required" in the sense that they have been appropriated by congress, and failure to pay entitlements isn't a default on any legal contract.

Entitlements are not legal debts of government.

Interest payments are contractually owed, obligations of government as an entity, not just an internal agreement within government (like entitlements).

This is not accurate.

Mandatory spending is so called because it is required by law. No matter what, the government must spend this money, unless the law is changed.

There is no such requirement for interest payments, and discretionary spending may be changed at will and spent at the discretion of the government.

The budgetary process is far more flexible than the legislative process, and the courts can't intervene absent a legal requirement.

 

[PhilKravitz]

back to the OP
if the debt limit is not raised then the government would have to, over the course of a year, spend something like $1.1T less. What would it cut? The only three big items are military, health care, social security.

 

[WhoWee]

back to the OP
if the debt limit is not raised then the government would have to, over the course of a year, spend something like $1.1T less. What would it cut? The only three big items are military, health care, social security.

There are other items to cut.
http://www.govexec.com/pay/

 

[PhilKravitz]

There are other items to cut.
http://www.govexec.com/pay/

From
http://www.census.gov/govs/apes/historical_data_2008.html
2008 is the most recent year the government is able to report on
There are 2.8 million employees at a rate of 186 billion dollars per year.
If we cut their pay by 25% we would only save 46.5 billion per year. Yes a start but not within an order of magnitude of the needed 1.1T.

 

[WhoWee]

From
http://www.census.gov/govs/apes/historical_data_2008.html
2008 is the most recent year the government is able to report on
There are 2.8 million employees at a rate of 186 billion dollars per year.
If we cut their pay by 25% we would only save 46.5 billion per year. Yes a start but not within an order of magnitude of the needed 1.1T.

How many Government employees are projected by 2015?

 

[mheslep]

back to the OP
if the debt limit is not raised then the government would have to, over the course of a year, spend something like $1.1T less. What would it cut? The only three big items are military, health care, social security.

Restore federal government spending, across the board, to FY 2007-2008 levels. Several of the states, at least the sanes ones, already have done similarly.

 

[PhilKravitz]

Restore federal government spending, across the board, to FY 2007-2008 levels. That will more than do it. Several of the states, at least the sanes ones, already have done similarly.

What was the federal budget in 2007? It is now 3.0T (2010).

 

[mheslep]

What was the federal budget in 2007? It is now 3.0T (2010).

2007: $2.7 trillion. 2010 spending is $3.7 trillion.

Data tables at the bottom:
http://www.usgovernmentspending.com...tack=1&size=m&title=&state=US&color=c&local=s

 

[PhilKravitz]

2007: $2.7 trillion. 2010 spending is $3.7 trillion.

Data tables at the bottom:
http://www.usgovernmentspending.com...tack=1&size=m&title=&state=US&color=c&local=s

I see what you mean. How the **** did that happen?

 

[WhoWee]

I see what you mean. How the **** did that happen?

That's what happens when legislators decide not to read the Bills before they vote. Congress seems to operate in a world where everybody gets the spending for projects they want. It's easy - they just need to agree to what someone else wants.

 

[Mech_Engineer]

It's also easy because there is no expectation of a balanced budget from the federal gov't. We've been operating under a deficit for so long no one believes it's possible to operate under a balanced budget. Now that we're hitting our self-imposed "credit limit" of $14T (an unimaginable number IMO) they just want to raise it rather than ask what got us here and how can we avoid getting deeper in debt...

It seems to me that no one has a real plan for doing anything with our current debt except increasing it. We can't just let debt pile up forever, we have to pay it back eventually...

 

[PhilKravitz]

We can't just let debt pile up forever, we have to pay it back eventually...

When you owe the bank $100 the bank owns you. When you owe the bank $10000000000000 you own the bank.

I do not expect the Federal government ever to pay off the debt in an honest way. They may create hyper-inflation and then pay off the worthless dollars.

 

[WhoWee]

It's also easy because there is no expectation of a balanced budget from the federal gov't. We've been operating under a deficit for so long no one believes it's possible to operate under a balanced budget. Now that we're hitting our self-imposed "credit limit" of $14T (an unimaginable number IMO) they just want to raise it rather than ask what got us here and how can we avoid getting deeper in debt...

It seems to me that no one has a real plan for doing anything with our current debt except increasing it. We can't just let debt pile up forever, we have to pay it back eventually...

I've posted similar thoughts in other threads. I'm in favor of this Congress doing nothing else but hone in on waste. I don't know any other way - except to dig into the details - instead of rounding to the nearest $1 Trillion.

I want to hold President Obama to his own standard.
http://www.nationalreview.com/corner/256199/obama-not-always-fan-upping-debt-ceiling-katrina-trinko

"Here are Obama’s thoughts on the debt limit in 2006, when he voted against increasing the ceiling:

The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies. … Increasing America’s debt weakens us domestically and internationally. Leadership means that ‘the buck stops here. Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better.

In 2007 and in 2008, when the Senate voted to increase the limit by $850 billion and $800 billion respectively, Obama did not bother to vote. (He did vote for TARP, which increased the debt limit by $700 billion.)"

 

[WhoWee]

When you owe the bank $100 the bank owns you. When you owe the bank $10000000000000 you own the bank.

I do not expect the Federal government ever to pay off the debt in an honest way. They may create hyper-inflation and then pay off the worthless dollars.

On the other hand, we could always pay off in nukes.

 

[mheslep]

The Republican first cut at spending reduction came out today. There are serious big number cuts here. Not enough, but its a start.
http://rsc.jordan.house.gov/UploadedFiles/Spending_Reduction_Act--TWOPAGER.pdf

The Spending Reduction Act of 2011 reduces federal spending by $2.5 trillion over ten years. The bill will specifically hold FY 2011 non-security discretionary spending to FY 08 levels, hold non-defense discretionary spending to FY 06 levels thereafter for the rest of the ten-year budget window...

Some specifics. I agree with all of them.

• “Stimulus” Repeal: Eliminate all remaining “stimulus” funding. $45 billion total savings.
• Eliminate federal control of Fannie Mae and Freddie Mac. $30 billion total savings.
• Repeal the Medicaid FMAP increase in the “State Bailout” (Senate amendments to S. 1586). $16.1 billion total savings.
• Amtrak Subsidies. $1.565 billion annual savings
• Corporation for Public Broadcasting Subsidy. $445 million annual savings. (Good riddance)
• Legal Services Corporation. $420 million annual savings.

My objections include the fact that they mostly left defense untouched. They do included defense in the 15% cut via attrition of all federal workers but aside from that nothing specific. One could argue that Obama/Gates have already proposed some hundred billion in defense cuts, but they should have signed on as cosponsors to those Obama/Gates cuts.

 

[mheslep]

Here Ryan's rules committee went ahead and voted to cut spending back to 2008 at least. The Democrats opposed, every one of them. That's just politically stupid at this point. Sign on at least for big picture and work later to save what you want. Both Republicans and Democrats come into this Congress with little fiscal responsibility credibility. But if the R's go ahead and cut spending as planned, the "kick me I'm stupid" t-shirt will hang solely on the D's.

The House Rules Committee on Wednesday approved by a party-line vote of 8-4 a resolution calling on House Budget Committee Chairman Paul Ryan (R-Wis.) to limit non-security discretionary spending in the second half of 2011 to 2008 levels “or less.”

http://thehill.com/homenews/house/138975-republicans-to-hold-spending-vote