The Debt Limit Is the Real Fiscal Cliff

December 3, 2012, 6:00 am

Washington is all abuzz over the impending tax increases and spending cuts referred to as the fiscal cliff, an absurdly inaccurate term that both Democrats and Republicans have unfortunately adopted in order to pursue their own agendas. In truth, it is a nonproblem unless every impending tax increase and spending cut takes effect permanently – something so unlikely as to be effectively impossible.

In my opinion, the fiscal cliff is akin to the so-called Y2K problem in late 1999, when many people worried that computers would freeze, elevators would stop running and planes would fall from the sky. Of course, nothing of the kind happened.

So if the fiscal cliff is a faux problem, why do we hear that industry and financial markets are deeply fearful of it? The answer is that there is a very real fiscal problem that will occur almost simultaneously – expiration of the debt limit. Much of what passes for fiscal-cliff concern is actually anxiety about whether Republicans in Congress will force a default on the nation’s debt in pursuit of their radical agenda.

No less an authority than the anti-tax activist Grover Norquist, who basically controls the Republican Party’s fiscal policy, has said repeatedly that the debt limit is where the real fight will be over the next several weeks. In a Nov. 28 interview with Politico’s Mike Allen, he was asked about the leverage President Obama has over Republicans in the fiscal-cliff debate. Mr. Norquist replied that Republicans have vastly more leverage when it comes to the debt limit.

MR. NORQUIST: Well, the Republicans also have other leverage, continuing resolutions on spending and the debt ceiling increase. They can give him debt-ceiling increases once a month. They can have him on a rather short leash, on a small – you know, here’s your allowance, come back next month if you’ve behaved.

MR. ALLEN: O.K., O.K., wait. You’re proposing that the debt ceiling be increased month by month?

MR. NORQUIST: Monthly. Monthly. Monthly if he’s good, weekly if he’s not. I mean, look, it’s an accordion, it’s an accordion, because if you’re really – well, that’s what they did – remember the first few months of the Obama – when the Republicans took the House and the Senate – took the House, they said, “O.K., here’s two weeks of continuing resolutions because you have saved $4 billion. Oh, now you’ve agreed to $8 billion in savings, you may have four weeks.” And they basically did – and what happened with the freshmen – remember, the Tea Party guys who just came in said: “This is taking too long. Let’s ask for it all.” And as soon as you asked for it all, you only got half of what you asked for, whereas you were getting everything you wanted. You were doing three yards in a cloud of dust, and you had – now, all those freshmen, newbie Tea Party guys are veterans. They would understand this time around why three yards in a cloud of dust for seven months is winning.

In short, the debt limit is a hostage that Republicans are willing to kill or maim in pursuit of their agenda. They have made this clear ever since the debt ceiling debate in 2011, in which the Treasury came very close to defaulting on the debt.

As Senator Mitch McConnell of Kentucky, the Senate minority leader, explained:

I think some of our members may have thought the default issue was a hostage you might take a chance at shooting. Most of us didn’t think that. What we did learn is this — it’s a hostage that’s worth ransoming.

At the risk of stating the obvious, the debt limit is nuts. It serves no useful purpose to allow members of Congress to vote for vast cuts in taxation and increases in spending and then tell the Treasury it is not permitted to sell bonds to cover the deficits Congress created. To my knowledge, no other nation has such a screwy system.

Nevertheless, we have a debt limit that is denominated in dollar terms; it is breached when the debt subject to limit, which includes bonds the government itself holds in various trust funds, rises above that limit. Currently, it is $16.394 trillion. The Congressional Budget Office estimates that given current spending and revenue trends, that figure will be reached before the end of the year.

At that point, Treasury will have to take extraordinary and costly measures to avoid technically hitting the debt ceiling. But these measures provide only a month or so of breathing room. At some point, Treasury will lack the cash to pay the bills that are due and it will face nothing but unthinkable choices – don’t pay interest to bondholders and default on the debt, don’t pay Social Security benefits, don’t pay our soldiers in the field and so on.

In a new book, “Is U.S. Government Debt Different?,” Howell Jackson, a law professor at Harvard, walks through options for prioritizing government spending in the event that Republicans insist on committing financial suicide. They are all illegal or unconstitutional to one degree or another. They would require the Treasury to either abrogate Congress’s taxing power, spending power or borrowing power.

In the October issue of the Columbia Law Review, Professors Neil H. Buchanan of the George Washington University Law School and Michael C. Dorf of Cornell Law School examine the question of what a president should do when he must act and all his options are unconstitutional. They cite Abraham Lincoln’s July 4, 1861, message to Congress in support of the idea that some laws are more unconstitutional than others and the president is empowered to violate the one that is least unconstitutional when he has no other option.

Said Lincoln, “To state the question more directly, are all the laws, but one, to go unexecuted, and the government itself go to pieces, lest that one be violated?”

In the present case, of course, the one law would be the debt limit, which Professors Buchanan and Dorf say is less binding on the president than unilaterally cutting spending or raising taxes without congressional approval. Hence, if Republicans are truly mad and absolutely refuse to raise the debt limit, thereby risking default or the nonpayment of essential government bills, Professors Buchanan and Dorf believe the president would have the authority to sell bonds over and above the limit.

There are a host of practical problems any time the president is forced into uncharted constitutional territory, as Lincoln so often was. But when faced with an extortion demand from a political party that no longer feels bound by the historical norms of conduct, the president must be willing to do what has to be done.

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