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The Fiscal Cliff Is a Sideshow, but the Debt Ceiling Is the Main Event: If House Republicans Refuse to Raise It, the President Should Show Them What Discretion Really Looks Like

With New Year’s Eve only twenty-five days away, all attention in Washington is focused on the budget negotiations designed to prevent a combination of tax increases and spending cuts from taking effect on January 1, 2013.  As Michael Dorf explained in a recent Verdict column, this so-called “fiscal cliff” is the result of a series of budget standoffs between Republicans and the President over the last two years, each of which has seen the Republicans adopt ever more extreme positions and tactics.

The imagery of the fiscal cliff is quite unfortunate, but it is also quite powerful.  Coined by Federal Reserve Chairman Ben Bernanke, the metaphor was meant to convey the idea that the deficit would be too low in 2013, unless Congress and the President steered the country away from an unnecessary decline in the economy.  As I will explain presently, however, any economic decline that would result from failing to act regarding the fiscal cliff would hardly be catastrophic, although it would inflict a certain amount of needless pain on innocent people.

Recent news reports indicate, however, that Republicans have become uncomfortable with allowing the scheduled tax increases and spending cuts to take effect as planned at the beginning of the New Year.  Instead, they are now openly threatening to create another contrived political showdown over the debt ceiling.  Even though last year’s debt ceiling debacle is part of what led to the current political standoff, Republicans are apparently maneuvering to get the spending cuts that they want—and avoid the tax hikes on the rich that they abhor—by refusing to increase the limit on the national debt, which would make it impossible to accommodate spending and tax cuts that Republicans have already approved.

The Republican strategy, therefore, avoids extreme austerity on January 1 by planning to create even more austerity a few weeks later.  Unlike with the fiscal cliff, however, the damage from refusing to increase the debt ceiling would be both immediate and severe.

What should President Obama do?  Republicans think that they can force him to cut spending, in order to avoid breaking through the debt ceiling.  The President, however, has several options.  And, as I will explain below, none of those options will be appealing to Republicans who imagine that they can put Mr. Obama in a corner.

Why Is the Current Fiscal Situation Not a Cliff?  Missing the January 1 Deadline Would Be Embarrassing, but Not Even Close to Catastrophic

Recently, some commentators have started to note that Chairman Bernanke’s imagery of the country careening off a cliff into oblivion was, to be kind, a bit overwrought.  Based on sound macroeconomic logic, Bernanke was correct to say that the economy would take a hit from the dose of austerity that the cliff would entail.  Even so, the damage would be neither catastrophic nor irreversible.

A recent analysis from the Congressional Budget Office (CBO) suggested that the unemployment rate would temporarily rise to 9.1% in 2013, from 7.9% today, due to the austerity policies that Congress’s earlier dysfunction has set in motion.  That is certainly something to be avoided, as it involves the loss of over one million jobs in relatively short order.  However, we are not talking about the economy’s plummeting off a cliff.

Moreover, the CBO makes clear that its forecast is based on the assumption that tax increases and spending cuts would take full effect, and would stay in effect, without being repealed and without Congress or the Federal Reserve taking any other action to offset the negative effects of austerity.

In reality, however, even if the parties in Washington could not prevent the contractionary combination of policies from becoming law on January 1, there is nothing stopping them from agreeing on January 9, or January 28, or even February 20, to retroactively undo the automatic changes that took effect on January 1.  For example, they could easily pass a tax bill, containing any combination of tax cuts that they choose, and making those cuts retroactive to January 1.

What would happen in the meantime?  It is true that, until the political deal was struck, people would have fewer dollars of take-home pay (and financial markets would be faced with somewhat more uncertainty than usual).  There would, therefore, be immediate negative effects on the economy; but those effects would accumulate only gradually.  Not only would the decline be gradual, but it would be reversible—indeed, more than reversible.  How, specifically, could it be reversed?  Congress could, for example, finally enact stimulus spending in amounts that it has refused to approve thus far.  That is why the analogy to a cliff is so dangerously misleading.

Of course, it is still true that it would be better for all of this to be resolved sooner, in order to prevent even those minor costs from being inflicted on the country.  Moreover, a resolution by Congress would prevent a needless waste of administrative resources—for example, forcing the IRS to deal with changing tax laws, just as the tax-filing season begins—from happening.

The point, therefore, is that there would be no need to hyperventilate about a particular deadline, or to fret over not meeting an exact date, if we were only worried about the administrative and macroeconomic costs of a foolish austerity policy that Congress should summarily reverse.  We are on a bad course, but correcting our course is neither difficult nor is it tied to a particular moment in time.

The Truly Explosive Moment: If Republicans Were to Use the Debt Ceiling to Extract Concessions, They Would Truly Be Threatening to Inflict Irreversible Damage on the Country and the World

The contrast between the fiscal cliff issue and the debt ceiling issue could not be more fundamental.  Whereas any damage that would arise from “going over the fiscal cliff” would be gradual and reversible, the damage from failing to raise the debt ceiling would be immediate and permanent.

For those who have blissfully forgotten about the last go-round on the debt ceiling, a bit of history (and basic accounting) is in order.

Early in the 20th Century, Congress decided to pass a statute that formally limited the amount of debt that the federal government could have outstanding at any given time.  This law was entirely unnecessary, because Congress already possessed the power to determine how much debt would be in existence, by passing an annual budget that would determine how much money would be added to the debt (or how much it was reduced) each year.  If Congress does not want the debt to rise, therefore, it has always had the power to make sure that it does not do so.

This statute, though unnecessary, never caused any serious harm, because for decades Congress considered it little more than a symbolic tool.  Having passed budgets that necessitated increases in outstanding debt, Members of Congress would then stand up to denounce the necessity of increasing the debt limit.  Some would even vote against an increase, knowing full well that their vote would not create a real problem.

In 2011, however, the radicals who took control of the Republican Party decided that it would be acceptable to force the U.S. government into a default, by refusing to increase the debt ceiling.  That is, even after they passed a budget that they knew would require the debt to rise above the statutory limit, they then refused to increase that limit to accommodate the necessary consequences of their own budget choices.

What was supposed to happen?  The Republicans’ answer is this:  When the Treasury Department reached the point where it had issued as much debt as it was legally permitted to issue, and where its incoming tax revenue was insufficient to pay the obligations to which Congress had committed the country, then Treasury would have to decide who was out of luck.

This means that people, businesses, nonprofit organizations, investors, and foreign governments with valid legal rights to be paid by the federal government would be told that they would not be paid.  For the first time ever in its long history, the United States government would default on some of its legal obligations.

For the radicalized Republicans, this prospect of default was not a problem.  It would mean, they thought, that the President would be forced to agree to spending cuts—that is, to take money away from people and businesses who otherwise would have received money pursuant to existing legal obligations.

Among those who might find themselves on the short end of the stick, however, are the very people who have loaned money to the federal government.  These bondholders are owed money under legal obligations that bind the federal government, just as is everyone else who is owed money under the federal budget statute.

The problem with skipping out on debts owed to one’s lenders is, of course, that those lenders might refuse to continue to loan money in the future.  No problem, the Republicans said.  We can “prioritize” payments, so that the people who are owed interest and principal on the debt are paid in full, even when everyone else is being told that there is no money to be found.

Even if one can imagine the federal government saying, “We’ll pay the Chinese government all the money that we owe them, but our military pensioners will have to wait,” the fact is that refusing to increase the debt ceiling puts the federal government in the position of failing to pay money that it owes.  This is quite different from deciding to spend less in the future, because it is a repudiation of obligations to which the federal government has already committed itself.

Once we reached that point, a true crisis would ensue.  Suddenly, the U.S. government would become just another potential welcher, forced to pay higher interest rates than necessary, and never again able to say that it is as good as its word.  The damage would be immediate, and lasting.

How Should President Obama Respond to the Republicans’ Threats?  Either Ignore the Debt Ceiling, or Exercise True Discretion in Cutting Spending

As I described at the beginning of this column, the House Republicans are now angling to extend the current budget statute, allowing us to avoid the January 1 imposition of spending cuts and tax increases.  However, House Speaker John Boehner has said that “there is a price for everything.” And here is the price: Boehner has said—repeatedly and unequivocally—that his party can force the President to agree to bigger spending cuts, as part of the “price” of increasing the debt ceiling.

Earlier this Fall, Professor Dorf and I published an article in Columbia Law Review, in which we explained that the debt ceiling is unconstitutional, for a variety of reasons.  Therefore, we argued, the President could continue to issue debt in excess of the (unconstitutional) statutory limit, if the duly-enacted budget required him to do so.

To this point, the White House has rejected our conclusion, although many Congressional Democrats (including House Minority Leader Nancy Pelosi) have embraced the view that the debt ceiling is unconstitutional.  It is understandable that the President would worry about taking what would seem to be a provocative act, but the point is that the Republicans would (if they refuse to increase the debt ceiling) have put him into a position where every choice is a provocation.

That is, the President would have no constitutional choices, because Congress would have told him to spend, tax, and borrow in amounts that are mathematically impossible to achieve at the same time.  In such a situation, the President should choose the least bad option.

Earlier this week, on the Economix blog of The New York Times, Bruce Bartlett cited the Buchanan/Dorf article and endorsed our conclusion that the President should treat the debt ceiling as a dead letter, rather than ignoring the dictates that Congress has set out in the taxing and spending laws.  In response, an angry reader claimed that Bartlett had advocated “literal tyranny.”

The idea, apparently, is that the President would become a tyrant if he simply set aside the debt ceiling, because that ceiling is enshrined in a federal statute.  Presidents cannot be given the power to pick and choose which laws to obey, else they become unaccountable and may be charged with abusing their discretion.

This idea, however, is actually one of the central reasons that Professor Dorf and I argued that the President should violate the debt ceiling, rather than the taxing or spending laws.  Even if we set aside the immediate and lasting economic damage that would accompany the failure of the federal government to make good on its obligations, the fact is that the threat of tyranny is greatest when the President begins to pick and choose which obligations to repudiate.

Indeed, as I argued last year, the President could easily describe a set of spending cuts that would scare the wits out of conservatives.  He is not, after all, required to apply across-the-board cuts (which would be a bad idea, anyway).  Why in the world would the people who deeply despise President Obama—who view him as a socialist, Nazi, foreign, Muslim Communist bent on the destruction of America—want him to have the power to choose which spending programs (including military projects) to cut?

Consider the ways in which the President could choose which spending to repudiate.  As one colleague recently suggested to me, the White House could announce that the spending cuts would be chosen in a way that would reduce the net federal subsidies that go to certain states.  Because nearly all such states elect Republicans (especially lightly populated Southern and Western states), this would inflict damage on those who did not support the President.

While some might argue that this would be a violation of the Constitution’s guarantee of equal protection, the President could easily use the Republicans’ own arguments against them.  The Republicans, after all, have long claimed that people who take more than they contribute should be cut off from the dole.  The President could say that it is not his fault that the “takers” all happen to be “red states.”  He just wants to cut off the idlers who expect the federal government to keep sending the checks.

An even more extreme possibility would be to say that the cuts would fall on all states equally.  That is, just as both Wyoming and California are allotted two seats each in the U.S. Senate, those two states should suffer the same reductions—dollar for dollar, not as a percentage of their state incomes or populations—from any spending cuts necessitated by obeying the debt ceiling.

The point is, of course, that these proposals (and a multitude of variations on them) are terrible ideas, and they are terrible precisely because they would vest too much power in the President.  If President Obama is not willing to simply say, as he should, that the debt ceiling is both economically disastrous and constitutional defective, then he should at least explain what he could do if the Republicans were to bestow tyrannical powers upon him.  One would think that his opponents would be interested in limiting his discretion, not expanding it.

Neil H. BuchananNeil H. Buchanan, a Justia columnist, is an economist and legal scholar, a Professor of Law at The George Washington University, and a Senior Fellow at the Taxation Law and Policy Research Institute, Monash University (Melbourne, Australia). He blogs at DorfonLaw.org, and he is the author of The Debt Ceiling Disasters: How the Republicans Created an Unnecessary Constitutional Crisis and How the Democrats Can Fight Back.
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2 Responses to The Fiscal Cliff Is a Sideshow, but the Debt Ceiling Is the Main Event: If House Republicans Refuse to Raise It, the President Should Show Them What Discretion Really Looks Like

  1. Mr. Buchanan, I kept reading you article waiting for you to address the long term effects of unlimited debt. It appears that you only look at the short term aspects of stimulus and spending. At what point does the debt need repaid? At what point do we become Greece? Europe is giving us many examples of what comes from too much debt. What is your long term stategy for an ever increasing debt?

  2. Pingback: How Many Times Will Speaker Boehner Save President Obama From Himself? | Neil H. Buchanan | Verdict | Legal Analysis and Commentary from Justia

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