Debt Limit Standoff

[Wayward Son]

A little ahead of schedule, but apparently it is part of the secret 3 pages of the resolution to make McCarthy speaker.  Apparently, the plan is to not allow the debt limit to rise, but to insist that there be targeted cuts, with certain debts being prioritized to be paid. 

Electoral-Vote.com has a pithy analysis of the consequences of such actions on the Republican party.

Recall, once again, that the debt-limit fight is NOT about future spending. It is about refusing to pay for spending Congress approved in the past. Greatly simplified, it is about the Pentagon asking for a new and expensive weapons system and Congress approving it and appropriating the money. Then, after the contract was signed, and the weapons were built, delivered, tested and accepted, the Republicans said: "We have decided not to pay the manufacturer's bill as stated in the contract." ... The U.S. government is not supposed to do this. Most people can understand the concept that after Congress has approved buying something and it is delivered, deciding not to pay the bill is not acceptable or legal. And it is completely different from a discussion about what Congress should buy next year.

The debt limit ($31.4 trillion) will be reached on Thursday, but Secretary of the Treasury thinks she can pull enough rabbits out of her hat to keep the debt under the limit until around June. At that point the government's monthly income from taxes will not cover the monthly expenditures for items Congress approved long ago. The Republicans' secret plan is to prioritize which bills get paid and which ones don't. On a microeconomic level, this would be like a family short of cash deciding to buy food but not pay the rent. Or deciding to pay the electricity bill but not the water bill. The details of the prioritization are not finalized yet, but some things are already known. One would be prioritizing paying interest on the federal debt, some of which goes to Chinese banks. Social Security, Medicare, and defense could potentially be spared, but that would mean enormous hits to the rest of the budget.

Cutting spending will be very difficult. Here are federal spending and revenues for 2022. The inner "pie chart" is revenue and the blue ring around it shows spending.

(Wikipedia chart of Federal spending and revenue in 2022 inserted here.)

As soon as the prioritization plan is published, the sh*t will hit the fan. The Democrats' ads write themselves; for example: "The Republicans think that paying interest to Chinese banks is more important than providing lunch to hungry American schoolkids." It will be brutal. If air traffic control is deprioritized and all airline flights stop, we predict it will take less than 24 hours for the ensuing uproar to force the Republicans to back down as business leaders explain to them precisely what will happen next. Especially in terms of campaign donations.

What the Republicans would like to do is cut "welfare" and leave everything else intact. The problem is that the math doesn't work. The 2022 budget deficit was $1.375 trillion, or about $115 billion/month. That means if no new debt can be issued (because the limit has been reached), monthly expenditures have to be cut by $115 billion in order to balance the budget. That's per month. Trying to get to that number would require eliminating many popular programs completely. The uproar would be much louder that the noise that would be picked up by placing a microphone between the rails while a New York City express subway train roared over it at full speed. ...

We have seen this movie before. In 2011 and 2013, when the Republicans also came with a prioritization plan, then-President Obama said the government makes millions of payments every day and there is no way to change the software to prioritize some payments and not make others. That would require redoing the government's software systems. That would first require writing a detailed specification, getting bids from vendors, analyzing them, picking a winner, and then getting the winner to write and test the software. The whole process would take years and the software would be full of bugs for years after that, especially if it had to been written overly fast to meet some deadline.

The problems with a prioritization plan are numerous. First, it would have to pass the House. No Democrat will vote for it so all it would take is five Republicans to vote "No" to kill it. Second, even if it passed the House, Senate Majority Leader Chuck Schumer (D-NY) would probably not even bring it to the floor. Third, if he did, it would be defeated even if every Republican senator voted for it. Fourth, if it magically passed the Senate, Joe Biden would veto it. It will never become law and the optics of even trying will lay bare either: (1) Republicans' true priorities or (2) Republicans inability to do simple arithmetic that any third grader can do. OK, with 13-digit numbers, maybe any fourth grader.

When push comes to shove in the late spring, what will the Democrats do? Biden might address the nation and explain the consequences of defaulting on the debt—a worldwide depression, a stock market crash, millions of jobs lost, etc. Then he will try to find five sane House Republicans to nip the plan in the bud. Where is Diogenes when you need him? If that fails and the Republicans simply will not budge, Biden has two options left. The first one is to order the U.S. Mint to produce some number of trillion-dollar platinum coins. It's sneaky, but it is absolutely legal. If the coins are deposited in the Fed's bank account and stored in Fort Knox but not spent, this stunt won't cause inflation because inflation happens when too much money is chasing too few goods and services. That wouldn't be the case here. This is just a stupid accounting trick.

The second one is for Biden to cite the Fourteenth Amendment and say that the debt-limit law is unconstitutional, so he will just ignore it and order the treasury to keep issuing debt. Section 4 starts out as follows:

The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.

What does that actually mean? (Note to John Roberts: If you are reading this, please drop us a line and explain it to us.) If Biden claimed the debt-limit law was unconstitutional, the Supreme Court would have to make the call—eventually. The Court would no doubt prefer not to make the call, so it would almost certainly insist on the case first being heard in a district court, then in an appeals court. It could take years to get to the Supreme Court, by which time it might have been solved some other way. In the unlikely event that it went this route and the Court took the case immediately and issued a ruling immediately, one of two things would happen. If the Court ruled that the law was constitutional, the government would probably abide by it and the world economy would crash. Guess who would get the blame? Hint: Not Biden. If the Court ruled that the Constitution says that debts incurred by Congress must be paid, then the problem would be solved for all time. Note that "pensions" are specifically mentioned in the Amendment. The Supreme Court could easily rule that includes Social Security (which did not exist in 1868 but is a kind of pension).

In short, we can't see how this stunt would be a winner for House Republicans once the voters understand what they are doing and its consequences.

Can you imagine the result of suddenly pulling $115 billion from our economy each month?  Not just for the people who were supposed to get the money, but for the goods and services they would have bought with the money.  The groceries that would not be bought.  The rent was would not be paid.  Which would trickle down to the farmers whose food would not be bought, the truckers who would not haul it, the bank loans that would not be paid...

And that's just in the U.S.

These House Republicans talk tough, but in the end, are they tough enough to pull the trigger when the gun is pointed at their own head?    Not to mention all of our heads, too? 

[Fenring]

Budget cuts would effect a reduction in the money supply, as well as a reduction in treasury liquidity globally. However with QT happening at the Fed they are sucking up fewer treasuries, so this may balance out somewhat. Overall though according to MMT government budget cuts will contract the economy somewhat and decelerate money. So I suppose that's concordant with what the Fed is doing. Contrast with the scenario with the Fed trying to cause a recession and the Federal govt increases budget, which could create a contradictory force, perhaps prolonging the pain. However I imagine Federal spending has at least a 1 year or longer lag to record its effects in the real economy, so we could well see overcontraction when the Fed thinks it has already tightened enough. Too bad these guys have no idea what they're doing other than throwing partisan words around.

[msquared]

As the Freedom Caucus has shown, they do not care who else gets hurt as long as they win.

And why do Republicans only worry about this when Dems hold the Presidency? (rhetorical question).

[Lloyd Perna]

In December, Congress should have addressed the debt limit when they passed the $1.7 trillion omnibus spending bill.   Why didn't the Democrats do it when they had control?

[yossarian22c]

In December, Congress should have addressed the debt limit when they passed the $1.7 trillion omnibus spending bill.   Why didn't the Democrats do it when they had control?

Yes, they should have increased in then. Guessing it had something to do with reconciliation and the time crunch of getting the budget done. But during the last two years the Democrats should have increased the debt ceiling by enough that the Republicans couldn't threaten economic harm to the country to get policy concessions.

[msquared]

Would you have been happy if a lame duck Congress had done that?

I am sort of suprised they didn't do it.

[NobleHunter]

They might not have been able to get it through the Senate.

It also seems to be a winning play for them to let the GOP threaten to blow up the global economy only to flinch at the last minute. It's ugly politics but effective.

[yossarian22c]

They might not have been able to get it through the Senate.

It also seems to be a winning play for them to let the GOP threaten to blow up the global economy only to flinch at the last minute. It's ugly politics but effective.

Seems too much like Russian Roulette. At some point the GOP crazies aren't going to flinch. It may hurt the Republican party more than the Democratic party but it will hurt the country most.

[Lloyd Perna]

They might not have been able to get it through the Senate.

It also seems to be a winning play for them to let the GOP threaten to blow up the global economy only to flinch at the last minute. It's ugly politics but effective.

This seems close to the reason me.  To pass it they would likely have had to compromise with the Republicans.  Now, they can attempt to put the blame on them.

It seems like a showdown is imminent.  Both chambers of congress are in recess until after the deadline and the White House is refusing to negotiate. 

[msquared]

part of me wished Biden would take this to the USSC to show that any limit on the debt is against the Constitution.

[yossarian22c]

part of me wished Biden would take this to the USSC to show that any limit on the debt is against the Constitution.

Doubt this supreme court would oblige.

[msquared]

But they are Originalist. A strict reading of the text.

[Lloyd Perna]

part of me wished Biden would take this to the USSC to show that any limit on the debt is against the Constitution.

I'm curious how you would justify this.

[msquared]

Well the 14th Amendment says the public debt of the US shall  not be questioned.

https://constitution.congress.gov/browse/amendment-14/section-4/#:~:text=Section%204%20Public%20Debt,rebellion%2C%20shall%20not%20be%20questioned.

The debt ceiling is for payments already authorized by Congress.  It is not new spending, it is spending already approved.

Havnig a debt limit, or at least not extending it to cover current obligations, seems to be against the 14th Amendment.

[Lloyd Perna]

I think you misunderstand.   The debt limit prevents the executive branch (to which congress has delegated the authority) from issuing new debt.  None of the Country's existing debt is being questioned.

It is up to Congress to finance their spending.

[msquared]

There is no mention of the Executive Branch in that amendment.

The spending has already been approved. The debt is, or will be owed, on authorized items from the Omnibus bill. This will add debt. The limit to this debt is not Constitutional.

[msquared]

To put it another way. There should not be any debt limit.

[Lloyd Perna]

You think the Treasury should be able to issue bonds without  the approval of Congress?

[msquared]

No, but Congress approved it when they authorized the spending. The spending has already been approved.
If the Republicans want to fight about the next budget they can. But these espenses have already been approved.

[Wayward Son]

The debt limit prevents the executive branch (to which congress has delegated the authority) from issuing new debt.

I don't understand what you are saying.  Congress has authorized the executive branch to issue new debt, and the debt limit prevents that from happening?    You might want to rephrase that. 

None of the Country's existing debt is being questioned.

Perhaps you could specify which of the major spending categories were not specifically authorized by Congress and for which spending is not authorized by bills passed by Congress.

Social Security
Health
Income Security
National Defense
Medicare
Education
Interest on Debt
Veterans Benefits
Transportation

Which of these is the executive branch spending more on than authorized by Congress or by legislation passed by Congress?  How much more?

Because right now I don't see anything that isn't authorized by Congress.  Which means you're complaining about nothing.

You think the Treasury should be able to issue bonds without  the approval of Congress?

How else do you propose that we pay for the debts that Congress has already authorized?

[Lloyd Perna]

They authorized spending, not new debt.

Only Congress has the authority to issue debt.

Between 1788 and 1917 Congress would authorise each bond issue by the United States Treasury by passing a legislative act that approved the issue and the amount.

In 1917, during World War I, Congress created the debt ceiling with the Second Liberty Bond Act of 1917, which allowed the Treasury to issue bonds and take on other debt without specific Congressional approval, as long as the total debt fell under the statutory debt ceiling. The 1917 legislation set limits on the aggregate amount of debt that could be accumulated through individual categories of debt (such as bonds and bills).

https://en.wikipedia.org/wiki/History_of_the_United_States_debt_ceiling

[msquared]

But that act may be unconstitutional. No one has tested it. The 14th Amendment says they are not able to do that.

That is what I think Biden should test in the US SC.

And you sure are parsing word here. If they authorize spending and they do not have the income, they have to use debt. The 14th Amendment says they can not limit the debt.

[Lloyd Perna]

But that act may be unconstitutional. No one has tested it. The 14th Amendment says they are not able to do that.

That is what I think Biden should test in the US SC.

And you sure are parsing word here. If they authorize spending and they do not have the income, they have to use debt. The 14th Amendment says they can not limit the debt.

Debt doesnt come from the sky,  You have to borrow the money from someone. 

[msquared]

And there are plenty of people who are willing to buy it.  Unless they think the country will not pay it which is what the Republicans are tying to do. They want the US to default on its obligations.

[Lloyd Perna]

The 14th amendment says they have to PAY their debts.   Passing a spending bill does not create debt, They do not owe that money to anybody yet.  The Treasury has to sell bonds or other debt instruments to incur debts.

[msquared]

Then they should raise taxes.

[Lloyd Perna]

Yes, Or cut spending.

[msquared]

But this spending has already been approved. And the Congress that passed it knew it would have to take on debt to pay for that spending. So the debt has been approved.

Cut spending/raise taxes in the next spending bill.

[Lloyd Perna]

So the debt has been approved

False

[Wayward Son]

So the debt has been approved

False

So, if "the debt" is not "the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties," then what freaking debt are you talking about?? 

[Fenring]

I just thought I'd throw in something that will probably leave Lloyd puzzled, which to be fair took me many hours of study (a few hundred) to be able to formulate in this way. If the U.S. government did what Republicans claim to want, i.e. lowering spending and (in theory) balancing the budget, it would be catastrophic for both the U.S. and the world's economies. The issuing of debt isn't just a matter of 'going into the red' as a nation, but in fact is the only source of Treasuries, which are the basis of the dollar dominance in the world. The fact that participants in all nations at this point service debt and work in USD is precisely why the U.S. is front and center as arbiter of liquidity in all markets. Cut off the supply of treasuries and there would be a liquidity crisis in all collateral-based markets, and the defaulting on USD denominated debt would cause a catastrophe. Think of 2008, but much worse. Lest we think that this is merely a charity-case argument about helping the world to work in one united currency, which by the way is also true and is good, the U.S. markets as well are utterly dependent on Treasury debt being auctioned, to the point where when collateral is in short supply the market can go into sudden turmoil, with interest rates skyrocketing and a run on recently released securities. This matter now goes far, far beyond whether the U.S. wants to balance the budget or not on ideological terms. The world, and the U.S., actually cannot sustain a cutoff of Treasury securities, nor should we want to cut them off. It's basically like saying let's destroy the source of all wealth creation to make a point. Well there's no point to that.

That doesn't mean the relative level of spending can't be adjusted, to release the quantity of treasuries on a variable basis to be determined. But greatly lowering the number is, unintuitively, the opposite of being fiscally responsible. It would contract the economy and slow down the speed of money (i.e. the quantity of hands it passes through per time). In a hot economy this could be ok. In a contracting economy it would make things accelerate toward recession.

[msquared]

The RINO MAGA Trumpist want that collapse to happen. Then they can blame the Dems. That is all that matters.

[Fenring]

The RINO MAGA Trumpist want that collapse to happen. Then they can blame the Dems. That is all that matters.

Honestly I doubt they understand it. That's one reason why the idea of the Congress controlling the issuance of debt is...well, silly.

[Lloyd Perna]

I think you guys are engaging in some mind reading, so let me be clear about my position here.

I'm not against raising the debt limit.

What I am doing is challenging msquared's claims that there is no need for congress to increase the debt limit because thy already approved the spending.

If the Democrats want to not have to approve new debt each time they pass new spending bills, they can simply pass a law that does so.

They have had control of both houses of congress and the presidency for two years.  They didn't care to make the effort.   Now that they have lost control of the house,  If they want to do that, they will have to work with the other side.  Blaming the republicans for the situation may be effective in some circles, but people paying attention know it is just political theater.

Fenring, in response to your post.

This is a straw man.  I, nor anyone I have heard, have seriously suggested balancing the budget immediately.  I personally would love to see the budget deficit reduced significantly in the long term.  Some level of deficit spending seems to have good economic impact.  I am concerned we have too much.

The Republicans will surely attempt to use this debt ceiling deadline to get some concessions on specific spending they don't like.

That doesn't mean the relative level of spending can't be adjusted, to release the quantity of treasuries on a variable basis to be determined. But greatly lowering the number is, unintuitively, the opposite of being fiscally responsible. It would contract the economy and slow down the speed of money (i.e. the quantity of hands it passes through per time). In a hot economy this could be ok. In a contracting economy it would make things accelerate toward recession.

Federal Spending in 2022 increased something like $17 billion. over 2021 increasing the deficit by $44 billion.  We have room to make some cuts without crashing the economy.

Honestly I doubt they understand it. That's one reason why the idea of the Congress controlling the issuance of debt is...well, silly.

They understand it. You should take that up with the Constitution.

The RINO MAGA Trumpist want that collapse to happen. Then they can blame the Dems. That is all that matters.

More mind reading.

[Tom]

They have had control of both houses of congress and the presidency for two years.

Well, sort of. They really needed one more vote for that to be true.

[Lloyd Perna]

51 > 50

[yossarian22c]

51 > 50

But not 60. Not sure if the debt ceiling falls under the reconciliation rules. Also not sure if Manchin and Senema were amenable to that.

But the crux is, increase the debt ceiling then negotiate the budget for next year. Or start trying to pass laws to claw back funding. But saying give us what we want or we'll crater the global economy isn't good policy.

[msquared]

They were 50-50 with Harris as the tie breaker.

[Lloyd Perna]

Exactly 51 > 50 .  Is math hard for you?

[Tom]

The problem here is that without 60 votes, any attempt to do anything to which Republicans would be opposed is vulnerable to filibuster. Without one more vote, they could not prevent the use of filibusters for that purpose.

[Wayward Son]

And 222 > 213, but we've already seen some big problems the House Republicans are having. 

I guess it will take the full two years before Lloyd realizes how hard it is go get things done with a slim majority.

Heck, this thread is practically dedicated to that truth! 

[Lloyd Perna]

And 222 > 213, but we've already seen some big problems the House Republicans are having. 

I guess it will take the full two years before Lloyd realizes how hard it is go get things done with a slim majority.

Heck, this thread is practically dedicated to that truth! 

I've been around a long time.  I'm well aware of how US politics work.

[Tom]

I'm willing to believe that you just pretend to be unaware for rhetorical purposes.

[Lloyd Perna]

I'm not pretending to be unaware.  I am trying to highlight the fact that with a slim majority, Compromise is required to move your agenda forward.  It's time for the Dems to play ball.

[TheDrake]

Play ball how, by privatizing social security, gutting environmental law, spending billions on a border wall while eliminating SNAP?

[jc44]

Sadly I don't think that "compromise" in politics means what we all thought it used to mean any more. These days it means "you give us something, we give you nothing"

[msquared]

How about a few tanks/planes/ships/submarines?  Just for a year or so?

[TheDrake]

We can see a very recent example of compromise in the legislation to protect gay marriage. Democrats gave up federal establishment of gay marriage in exchange for transferability and recognition of gay marriage from another state. Lawmakers on both sides may face challenges from further to the right and left over it. A government made up primarily of the freedom caucus and the progressive wing is going to have a hard time with common ground. And any time centrists from both parties collaborate on a compromise, they are likely to get replaced by the "purists"

[msquared]

Because the extreme wings of both parties call the centrist sell outs. 

But which extreme wing has any real power in Congress right now?

[TheDrake]

Because the extreme wings of both parties call the centrist sell outs. 

But which extreme wing has any real power in Congress right now?

Did you miss the speaker votes?