I write today about the looming debt limit challenges currently facing Congress. This is a pivotal moment for our country as it sets the tone for future spending behavior. Similar to the FY 2011 budget, this presents an opportunity for Republicans to show real leadership and to define the difference between the two parties by actually restricting spending deficit levels. In the last election cycle, voters unmistakably were intent on having a different type of governance in Washington. This is a serious issue as reflected by Treasury Secretary Tim Geithner’s letter to Senate Majority leader Harry Reid on January 6, 2011 which stated that the consequences of defaulting would mean payments would be “discontinued, limited, or adversely affected.” Although Geithner’s letter may have been using emotional political rhetoric, it represents the significance of the problem. Although President Obama is in agreement with Geithner, at one he was opposed to this type of action. Obama recognized the dangers associated with continually increasing the debt limit. In 2006, Obama, then Senator, voted against raising the 2006 debt ceiling stating, “the fact that we are here today to debate raising America’s debt limit is a sign of a leadership failure… Washington is shifting the burden of bad choices today onto the back of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better.” Although he now claims that vote was a mistake, it is interesting that he was able to recognize the implication of raising the debt limit, perhaps now he is willing to ignore the repercussions in order to continue his pro-government programs.
The government will soon run up against its limit of $14.294 trillion in debts, which the Treasury expects will occur before May 16, 2011, although with a few short-term tools, they could extend their borrowing capacity until July 8, 2011. Congress and the President must decide whether or not to raise the limit and thereby permit continued borrowing. The debt limit has already been raised 10 times since 2001. Based on Obama’s budget proposals, the deficit is projected to reach $26,200 billion by 2020, an increase of over $1 trillion in each fiscal year now until 2020. Under current estimates, the government would essentially need to issue an additional $738 billion in debt above the current statutory limit in order to finance obligations for the remainder of FY2011. Congress has the power to deal with this as granted in the Constitution, Section 8 of Article 1, where it states they are vested with the “Power…to borrow money on the credit of the United States.” Congress then delegates the exercise of this power to the Treasury Department, with a statutory limit on the amount of federal debt that the government may issue at any one time. Legislation adjusting the debt limit takes the form of an amendment to 31 U.S.C. 3101(b), usually striking the current dollar limitation and inserting a new one.
The deficit is one of the most significant problems facing America and should be dealt with using a cautious hand. Currently, the gross domestic product (GDP) is at nearly 10%, representing the largest budget deficit since World War II. Several factors including excessive spending levels, the recession, stimulus bailouts, and lowered tax revenues are all to blame for the massive shortfalls. The federal government borrowed borrowed nearly 40 cents of every dollar that it spent in 2010. Additionally, increased debt limits inherently mean that America must spend more on interest payments. Instead of putting this money towards the military or other essential programs, America would pay $260 billion in interest alone in FY2012 under the President’s budget plan. This is the equivalent of all the spending by the Departments of Education, Homeland Security, Housing and Urban Development, Justice, and State, combined. Under Obama’s proposals, America would owe nearly a trillion in interest payments by the year 2021. This resultantly weakens the country’s credit rating. America’s health as a world power is in jeopardy if the financial train is not redirected onto another track.
If the debt ceiling is not increased, the Treasury would face two very contradicting mandated laws which would present a significant legal quandary that even perplexes most scholars. The Treasury is prohibited by law from issuing additional debt above the statutory limit yet it is also obligated by law to spend money for several specific purposes. The Treasury would be limited to incoming receipts, and would face a sizable conflict in which something would have to give. It is likely that the Treasury would prioritize paying on interest costs first to preserve the full faith and credit of the U.S. government and avoid defaulting on debts due. However, after this, the Treasury would be forced to prioritize what gets paid now and what gets put aside for later. Although it is not designated by law and would appear to contradict America’s central democratic principles, some believe that the President would step in to set the priorities for which bills ought to be paid. It would become a media circus with the President undoubtedly pointing his finger at the Republicans and pronouncing that they are irresponsible and don’t really care about Americans.
A final consideration for Congress should be how the debt limit will affect the markets. The publicly held debt stood at $9.018 trillion at the end of 2010. The credit markets would likely falter in the face of uncertainty as the U.S. government’s debt is used by many as a measure of the health of the global market. The shakeup caused by the uncertainty could have detrimental implications on interest rates and even the dollar exchange rate.
Congress ultimately has three options in dealing with this issue. First, they can opt to hold the debt limit in place which would force an immediate massive restructuring of federal spending. This would be a reduction in non-interest spending averaging about $125 billion each month, or 1.5 trillion for the year 2011. This would be roughly equal to all security and non-security discretionary spending which would have to cease instantly. Given this possibility, Congress would be advised to legislate clear guidance as to the broad prioritization of federal spending to avoid massive confusion. Otherwise, as mentioned, the Treasury would be left with no choice but to exercise their own judgment on how to use the insufficient funds. Again, it does not behoove House Republicans to allow Obama’s appointees, such as Timothy Geithner, a man who is considered to have a populist agenda at times- notably when he pushed for ending the Bush tax cuts, to be in such a powerful role. One such bill has already been introduced, The Full Faith and Credit Act, H.R. 421, a companion to S. 163 in the Senate, would effectively direct the Treasury to pay principal and interest due on the debt held by the public before making any other payments. This has wide support by many including Federal Reserve Chairman, Ben Bernanke who stated this could “reduce the risk with the debt limit.”
A second option is to increase the debt limit but to do so with substantial, immediate spending reductions. Each cut would translate into less debt the federal government must issue and that much less net interest it must pay in the future. An automatic incentive would be built in as Congress could use these required changes as leverage before agreeing to the debt limit increases in 2012. This would be a great way for the House Republicans to display long term foresight that this Country has been lacking for so long.
Lastly, another option is to raise the limit and enact significant budget reforms, possibly in addition to deep, immediate cuts. Congress could adopt strict spending caps for total spending each year, including caps on entitlement programs, backed by automatic sequestration triggers and other protections to prevent Members from waiving the rules.
The second two options are most viable as part of a compromise between Congress and President Obama. If Speaker John Boehner can effectively compromise to increase the debt limit with major budget reforms attached, it would be a notable success. Just like the debate over the budget, the most significant thing is the fact that for the first time in several years, the discussion is not about whether or not to cut, but rather, how much can we effectively cut. It appears that House leadership is aware of the need to have a unified Conservative voice on this as things progress, as opposed to how the party fractured over the budget issue. Currently, Republican aides claim the core of the GOP’s position will also include mandatory immediate reductions in discretionary and mandatory spending. A GOP leadership aide also indicated that proposed cuts that Republicans view as immediate include hard caps on discretionary spending, cuts to Medicaid spending and reductions in the overall size of the federal workforce, potentially by limiting the number of new workers hired to replace retiring workers. The negotiations will be contentious, but hopefully the end result is a significantly altered approach to spending in this country. Additionally, this Congress needs to find ways to deal with the deficit in such a way as to avoid the yearly increases the Treasury will otherwise demand.