THE NEXT DEBT CEILING AND BALANCED BUDGET AMENDMENT DEBATES: DOING THEM RIGHT. MAKING THEM REAL – Part 3 (The Limits of Partisan Brinksmanship)

“… we can no longer let partisan brinksmanship get in our way ….”

          –        President Obama’s Weekly Address (August 13, 2011)

The greatest strength of Tea Partiers during the debt ceiling debate was its unity in the brinksmanship needed to close the final deal.  This brinkmanship, however, will soon become a liability if it is only leverage that the Tea Party can exert.  Since it is the public that feels endangered by the threat of default or a government shutdown, resorting to brinksmanship on these occasions will inevitably alienate voters and undermine the Tea Party message of smaller government and fiscal responsibility.

This does not mean that such brinkmanship is the same thing as “extortion” or “hostage-taking” or any of the other hyperbolic epithets hurdled at the Tea Party when it became apparent that they meant what they were saying.  As Professor Eugene Volokh has pointed out on the Volokh Conspiracy legal blog, a genuine extortion or hostage-taking victim simply wants to be left alone.  The analogy loses all validity and persuasiveness when it is the so-called victim that is making demands, or as Professor Volokh put it: President Obama and his supporters “wanted the conservative legislators to cast their votes to authorize a debt limit increase. They wanted taxpayers to be on the hook for repaying an increased national debt. They wanted people’s cooperation, and were then complaining about the conditions that the people imposed for such cooperation.”

The proper analogy is not to “extortion” or “hostage-taking,” but to the “holdout” problem in land condemnation cases.  Whenever private land is needed for a truly public project, the government must have the power of eminent domain to prevent holdouts from exploiting this need to extract unjust compensation.  President Obama needed the cooperation of Tea Party legislators to raise the debt ceiling, but obviously felt that they were demanding too much in return, particular their refusal to accept a tax increase.

Viewed from the “holdout” perspective, what House Republicans did in the debt ceiling vote was no different than what legislators of both parties have always done in a close vote: they hold out for something greater than what they would have gotten by agreeing earlier in the process.  Remember the “Cornhusker Kickback” during the ObamaCare debate, when Senator Ben Nelson demanded a Medicaid carve-out for Nebraska? Or when Senator Bernie Sanders took credit for $10 billion in new community health center funding? Or when the President had to promise Senator Mary Landrieu an extra $300 million in Medicaid funding for Louisiana to win her ObamaCare vote?

The only substantive difference between these hold-out senators and the Tea Party legislators – and it is a crucial difference indeed – is that the Tea Partiers were principled enough to resist the type of “sweetheart deals” that got ObamaCare passed.  The vitriol against the Tea Party only came out when President Obama and his supporters on Capitol Hill and in the media realized that (1) no “sweetheart deals” were available and (2) there was no equivalent power of eminent domain to force a compliant vote to raise the debt ceiling. 

Lacking the power to force a deal, President Obama had to meet the “no tax increase” demand because he could not be certain how close to the default brink the Tea Party legislators were willing to go.  This was reminiscent of President Reagan’s success on Inauguration Day 1981 in making Iran believe that he was unstable and angry and ready to attack if the American hostages were not released.  President Reagan also recognized the limits of this strategy, however, and never repeated it.

Similarly, the public at large will not endure brinksmanship every time the debt ceiling must be raised or the new fiscal year starts without the passage of appropriations bills.  The public knows that the harm from an actual default or a prolonged government shutdown will fall on them rather than the political class in Washington.  Still we did learn a valuable lesson from the success of the Tea Party in facing down President Obama and the Democratic leadership in Congress.

What made brinksmanship over the debt ceiling an effective strategy this last time was fear of the unknown.  Since default by the Treasury is an unprecedented event, no one can accurately predict the effect of an actual default on the economy and our financial markets.  (Note: A technical default occurred in 1979 when the Treasury made a few late payments, blaming technological glitches, but the noteholders were soon paid in full.)  If Tea Partiers want to make the national debt limit a real “ceiling,” they must do more than show their own lack of fear over a potential default.  They must eliminate, or at least greatly diminish, the public’s fear of the unknown if the debt ceiling is not raised.

This goal can only be accomplished by establishing a payment priority plan before the debt ceiling has to be raised again.  Indeed, the most remarkable aspect of the recent debt ceiling debate was the absence of commentary over this “elephant in the room”: Who get paid first if the Treasury has insufficient funds to cover all of its debts and other obligations?

It was not until very late in the process that we started seeing news reports like this July 27, 2011 New York Times article, “Treasury to Weigh Which Bills to Pay,” which informed us only that Treasury officials “would address the issue [of payment priorities] later this week unless it became clear that Congress would vote by Aug. 2 to let the government borrow more money.”

Since a debt ceiling deal was reached on August 2, we never found out what the Treasury’s payment priority plan actually was, but we did learn that the President was willing to engage in his own “partisan brinksmanship.”  This brinksmanship occurred when Administration officials “said repeatedly that Treasury does not have the legal authority to pay bills based on political, moral, or economic considerations…,” meaning that Treasury supposedly had no choice but to make payments in chronological order as they came due.  We do not know if President Obama really meant this, but it certainly allowed him to scare the American public by suggesting that Social Security benefits might not be paid because they did not always come due first.

While the President’s warning might have been true for many popular programs, it was patently false for Social Security because securities in the Social Security Trust Fund could always be redeemed to pay for monthly retirement and disability checks.  President Obama was apparently unaware that the national debt limit applies to both debt held by the public and intra-governmental debt (such as the Trust Fund).  Thus, the Administration could have cashed in Trust Fund securities by selling more debt to the public without breaching the debt ceiling since the intra-governmental debt would have been reduced by an amount equal to the increase in public debt.  For more on this issue, see here,  here, and here.

This still leaves the crucial question is whether, as a matter of law, the President does indeed have the authority to abandon the chronological “payment when due” rule and set payment priorities on his own discretion, at least in the absence of a payment priority statute.  Remarkably, not only is there no definitive legal opinion resolving this issue, but there does not appear to be a published article or detailed analysis even discussing the issue!  (If readers know of one, please bring it to my attention.)

Even if the President does have such legal discretion, there are no official guidelines or criteria by which this discretion would be exercised.  Hence the fear of uncertainty that transformed a routine increase in the debt ceiling into brinksmanship over the first genuine Treasury default in our nation’s history. 

If the Tea Party truly wants to use the debt ceiling statute (or a debt ceiling provision in any future Balanced Budget Amendment) for budget leverage in the future, then it has to take up this issue of a payment priority plan.   The law and politics of such a plan will be the focus of the next two posts in this series.

Copyright © 2011 Anthony W. Hawks. All rights reserved.

THE NEXT DEBT CEILING AND BALANCED BUDGET AMENDMENT DEBATES: DOING THEM RIGHT. MAKING THEM REAL – Part 2 (A Truly “Balanced” Approach)

The recent battle over raising the debt ceiling succeeded in bringing the dangers of our exploding national debt front and center, but it did not change the terms of the debate itself.  The media and political class still chatter about “spending cuts” when all they really mean are “reduced spending increases.”  Thus, for all the talk about setting a precedent requiring future ceiling increases to be matched by equal cuts in spending, the only real precedent is for matching future increases with promises of smaller spending increases, which may or may not be kept.  

Before we can have a real debate about the national debt, we need to talk with a common language.  Without a consensus on the meaning of key phrases like “spending cuts” and “tax increases” (not to be confused with “revenue increases”), and what makes a deficit reduction plan “balanced,” the parties will continue to talk past each other and mischaracterize their opponents’ position.

This is why the Republicans would have been right to reject President Obama’s proposal for a “balanced” deal with $800 million in higher taxes even if the President had not moved the goal posts by demanding $400 billion in higher taxes after Speaker Boehner was apparently willing to concede an $800 billion tax increase.  The problem here is one of inconsistent baselines. 

When the President offered his “balanced” approach, he was talking about tax increases over the current year revenue baseline.   At the same time, he was only willing to consider spending cuts from future year baselines.  Since current law ensures that future spending baselines are automatically higher, the so-called “spending cuts” would merely have reduced the size of these automatic increases.

A truly “balanced” approach would have proposed spending cuts from the current year baseline in exchange for revenue increases also from the current year baseline.  To use concrete numbers, according to the Congressional Budget Office, spending for fiscal year 2011 will reach about $3.70 trillion, while revenue for 2011 will only total $2.2 trillion, leaving an expected deficit of $1.5 trillion.  A “balanced” deficit reduction plan would have cut spending and raised revenue in similar amounts from the same current year baseline.  A “balanced” plan to actually balance the budget would have proposed cutting spending by $750 billion, while raising $750 billion in revenue to achieve a balanced 2012 budget of $2.95 trillion.

Of course it is not politically realistic to balance the budget in a single year, but unless you start from the same baseline you can never negotiate a realistic plan.  With the same baseline, you do not even need a “balanced” approach (as I have defined it) to eliminate deficit spending. You can do it without spending cuts or tax increases by keeping spending under the current $3.7 trillion baseline and letting revenues rise based on recent projections of economic growth.  Such an approach would balance the federal budget in six or seven years.  Still too little, but far better than anything the President or Republican leadership has proposed.

 Democrats argue that the no deal is possible as along as Republicans are bound to the “Taxpayer Protection Pledge” sponsored by Americans for Tax Reform (ATR).  If President Obama had been serious, however, about wanting Republicans to break this Tax Pledge, he would have offered spending cuts for higher tax revenues from the same baseline.  If these additional revenues had come from higher marginal rates, Republicans would still have been wise to reject the offer as economically destructive and more class warfare.  But if the President had offered spending cuts from the current year baseline of $3.7 trillion in exchange for additional revenues from a simplified code and expanded tax base, then Republicans would have been ill-advised to turn down such an offer, especially if the Bush tax cuts had also been made permanent.

Yes, such a deal would have violated the ATR pledge against “any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates,” but it would also have chipped away at what is or should be the primary goal of the Tax Pledge, namely, to shrink the size and scope of the Federal Government.  If Speaker Boehner ever wants to consider a future deal with increased tax revenues, then he should ask the ATR for a revision in the Tax Pledge, to wit:

            “I, _________________, pledge to the taxpayers of _____________, and to the American people that I will:

            “ONE, oppose any and all efforts to increase the marginal income tax rates for individuals and/or businesses; and

            “TWO, oppose any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates or by cutting entitlement or discretionary spending from the current fiscal year baseline.”

Of course, there is about as much chance that President Obama will offer a truly “balanced” deal as there is that the media will stop referring to spending increases as “spending cuts.”  What Tea Party Republicans can do to change the debate, however, is to start thinking about how the debt ceiling should be used next time around without relying on the same type of economic brinksmanship that we saw in the last debate.

Such brinksmanship may have finally forced the Washington establishment to take the Tea Party seriously, but it achieved very little of substance, while releasing a torrent of calumny that portrayed the Tea Party as arrogant and insensitive to economic reality.  What Republicans should realize, however, is that the reason why Democrats could raise the specter of economic chaos during the debt ceiling standoff was not intransigence on the Republican side, but the absence of any payment priority plan if the debt ceiling were not raised.

While opponents of raising the debt ceiling were correct that the U.S. Treasury always had revenue sufficient to avoid default on the national debt itself, they were far too sanguine about the possible effects on the economy and our financial markets from uncertainty over what was not going to be paid – not to mention the likelihood of a virulent political reaction if government benefit checks had been delayed or cancelled.

Of course the absence of a payment priority plan was not the fault of the Tea Party.  The President has the primary responsibility to put one in place, both because he has the resources at Treasury and OMB to do so, and because no other political actor can set these priorities at a granular budget level.  While Congress set a few general priorities, it would be impractical to expect Congress to make priority decisions among thousands of budget items, particularly when political power is divided among the parties and dispersed throughout numerous committees. Indeed, the Senate has been unable to pass a budget resolution of any type in two years.

The absence of a payment priority plan should be the focus of political debate over any future increases of the debt ceiling.  What a payment priority plan might look like and how opponents of the future increases should press for one will be addressed in the next three posts.

 Copyright © 2011 Anthony W. Hawks. All rights reserved.

Rev. 08/14/11

THE NEW DEBT CEILING AND BALANCED BUDGET AMENDMENT: DOING THEM RIGHT, MAKING THEM REAL – Part 1 (The Public Debt Clause Debate)

By his own admission, the President’s primary objective in the recent debt ceiling debate was to ensure that it would not be repeated until after the 2012 elections.  By all appearances, he has achieved this goal.  No one can know for sure, of course, how long this deal will postpone the next debt ceiling debate – another Hurricane Katrina or 9/11 attack can always bust next year’s budget – but most press accounts believe that President Obama has pushed it off until 2013.

What we do know is that under the new Budget Control Act of 2011, the previous debt ceiling of $14.294 trillion was immediately raised by another $400 billion in exchange for $917 billion in promised reductions in future spending increases over the next 10 years (aka “spending cuts”).  As for more debt ceiling increases, the President can certify another $500 billion increase by December 31, 2011, and a further $1.2 trillion increase in 2012.

This last increase of $1.2 trillion can go as high as $1.5 trillion if (i) Congress approves up to $1.5 trillion in additional “spending cuts” through 2021 (in which case the debt ceiling increase and spending cut totals are supposed to match), or (ii) Congress passes a joint resolution with the words “balanced budget amendment” in its title, the precise terms of which have yet to be worked out – sort of like the baseball equivalent of a “player to be named later.”  All of these debt ceiling increases, except the immediate raise of $400 billion, can be disapproved by Congress, but only if a majority in both Houses affirmatively vote to disapprove.  Any tie goes to the President.

Regardless of how this budget deal is implemented, we can all be grateful for the constitutional debate it has sparked over the Public Debt Clause, particularly how it has driven opponents of the debt ceiling to seek legal justifications for having President Obama borrow money without Congressional authorization if the debt ceiling were not raised.  The President wisely refrained from doing so, which would have caused far more damage to our Constitutional system of checks and balances than would have resulted from a failure to pay every obligation that Congress has foisted on the American taxpayer.  Still, the mere fact that this argument gained traction in the media and legal academy underscores the premise of this blog (see Statement of Purpose), which is that the Constitution has been amended many times outside of Article V.

If the President had claimed the power to borrow money without Congressional approval and this action had been allowed to stand, then no less than five separate provisions of the Constitution would have been effectively amended, not just the Public Debt Clause that opponents of the debt ceiling want to rewrite:

1.   The Revenue Origination Clause (Article I, Section 7, Clause 1) would have been amended from “All Bills for raising Revenue shall originate in the House of Representatives” to “All Bills for raising Revenue shall originate in the House of Representatives, except for Revenue that the President raises by borrowing Money without Congressional authorization.”

 2.  The Borrowing Clause (Article I, Section 8, Clause 2) would have been amended from “Congress shall have the Power … To borrow Money on the credit of the United States” to “Congress and the President shall each have the Power … To borrow Money on the credit of the United States, but Congress can only borrow Money by enacting a Statute that is subject to Presidential veto, while the President can borrow Money without any Congressional authorization.”

3.   The Public Debt Clause (14^th Amendment, Section 4, Clause 1) would have been amended from “The validity of the public debt of the United States, authorized by law, …, shall not be questioned” to “The validity of the public debt of the United States, whether or not authorized by law, …, shall not be questioned.”

4.   The Enforcement Clause of the 14^th Amendment (Section 5) would have been amended from “The Congress shall have the power to enforce this article by appropriate legislation” to “The Congress shall have the power to enforce this article by appropriate legislation, while the President shall have the power to enforce the first sentence of Section 4 of this article by executive order.”

5.   The Appropriations Clause (Article I, Section 9, Clause 7) would have been amended from “No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law” to “No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law, except for Money drawn from the Treasury that the President raised by borrowing without Congressional authorization.” 

This manner in which the Appropriations Clause would be amended is particularly interesting because it would parallel the way in which the Taxing Clause (Article I, Section 8, Clause 1) was amended in 1936-1937, to what is now called the “General Welfare Clause.”

A detailed discussion of how this amendment took place outside of Article V is beyond the scope of this post and will be addressed at a later time, but the bottom line is that the Supreme Court in a series of decisions (United States v. Butler in 1936 and Helvering v. Davis in 1937) used the Taxing Clause language “to pay the Debts and provide for the common Defense and general Welfare” to convert a limitation on the taxing power into an independent spending power.

Before 1936, this language meant that Congress could only raise taxes for three general purposes: (1) paying debts of the United States; (2) promoting the common defense of the United States; and (3) promoting the general welfare of the United States, all of which had well-understood public meanings when the Constitution was first ratified.  By 1937, this language had been changed to mean that Congress now had a spending power that was no longer incidental and subordinate to the principal powers enumerated in the Constitution.  The problem was  greatly compounded, when as part of this amendment process, the Supreme Court gave Congress the exclusive power to define “general welfare” as it wished.

The linguistic sleight of hand by which the Supreme Court amended the Taxing Clause was to assume that any tax revenue raised for the “general welfare” could also be spent for the “general welfare” (defined as broadly as Congress wishes), rather than for the far more limited purpose –  imposed by the Necessary and Proper Clause (Article I, Section 8, Clause 18) – of implementing just those powers enumerated in Section 8 and elsewhere in the Constitution.

Returning now to the Appropriations Clause, opponents of the debt ceiling are making the converse argument.  Whereas the amended “General Welfare Clause” enables Congress to spend whatever tax revenue it can raise, opponents of the debt ceiling now want the Appropriations Clause to mean that the President can raise whatever tax revenue Congress decides to spend.  Such is what passes for constitutional debate these days.

The lead article in today’s Washington Post is all about how House Republicans, following a two-year strategy, “created a majority and gave itself a ‘leverage moment’ in the epic clash over the debt deal.”  When the yet-to-be proposed balanced budget amendment is rejected later this year, and the new super-committee is deadlocked over tax and entitlement reform, I seriously doubt many of the Tea Party-inspired Republicans will feel enthusiastic over the “epic” victory they supposedly achieved last week.

If this happens, we will only have the promise of $1.2 trillion in future “spending cuts” that are supposed to be automatically enforced by the new “sequestration” rules.  At that point, we may re-discover that sequestration can be also waived by Congress.  Are we then left with having to wait for another debt ceiling “epic clash” in 2013?  Maybe, but if so, opponents of another debt ceiling increase should start planning now.

As it turns out there is a strategy that fiscal conservatives can pursue – without waiting for the new “super-committee” – which will not only (i) make the debt ceiling a real ceiling the next time around, but also (ii) create a realistic chance for adopting a balance budget amendment that is not only enforceable, but also self-executing.  This strategy will be the subject of the next four posts.

Copyright © 2011 Anthony W. Hawks. All rights reserved.