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Joshua Holland: 5 Fun Facts About the Fight Over the Debt Ceiling

April 29, 2011

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That lawmakers who receive a paycheck to govern this country are threatening to bring about economic catastrophe shows that our discourse is approaching Peak Crazy.

By **Joshua Holland**

By arrangement with Alternet.Org.

Josh-final.JPGOne thing on which virtually everyone agrees—Democrats, Republicans, and experts from across the political spectrum—is that not raising the debt ceiling will lead to economic catastrophe. It would send shockwaves across the financial system, undermine confidence in the dollar as the world’s reserve currency and reverse our fragile “recovery,“ resulting in an extraordinarily painful double-dip recession.

That lawmakers who ostensibly receive a paycheck to govern this country are threatening to bring that dire reality about may be a sign that our political discourse has achieved Peak Crazy.

It may be crazy, but according to a recent CBS/ New York Times poll, Americans oppose lifting the debt ceiling by a 63-27 margin. It’s safe to conclude that a significant majority of them would not be in favor of causing massive upheaval in the global economy (and a second, deep recession), so it’s probably a good time to shed some light on what the debt ceiling does, and why not raising it has never been a serious option.

Here are five things you ought to know about the fight ahead.

But as Stan Collender notes, reaching the ceiling is somewhat like maxing out your credit cards. When it happens, you don’t sit home in the dark doing nothing; instead, you might borrow some money from a friend, not pay some bills until the next paycheck or sell off some of that junk in the garage.

1. Keeping the Current Debt Ceiling isn’t a Means of Controlling the Deficit

The only explanation for the polling on this is that people think that not raising the debt ceiling is a way of controlling the national debt, which, they are told just about every day, is a dire crisis.

But debt is created when Congress authorizes the government to spend more than the revenues it takes in, and that’s an entirely separate process. That process has now brought us to the debt limit—an arbitrary line established by Congress in the 1940s and increased regularly since then.

Every legislator who voted for the 2011 budget deal is responsible for authorizing the government to spend $3.7 trillion while raising $2.2 trillion in tax revenues, and what we’re currently debating is whether the government will pay its tab or default on any debt that goes over the ceiling.

As the Congressional Budget Office (CBO) put it:

By itself, setting a limit on the debt is an ineffective means of controlling deficits because the decisions that necessitate borrowing are made through other legislative actions. By the time an increase in the debt ceiling comes up for approval, it is too late to avoid paying the government’s pending bills without incurring serious negative consequences.

Ironically, failing to raise the debt limit will make our fiscal deficits far worse. The leading cause of today’s deficit is not two wars or the Bush tax cuts—it is the recession itself, which sent tax revenues into a deep hole. As David Min, a financial markets analyst at the Center for American Progress, notes, failing to raise the debt limit would make the budget deficit “worse by forcing a massive multitrillion dollar hit to an already struggling economy and threatening to take us into a second Great Depression.”

It is no small irony that the base of a political party whose rhetoric centers around responsibility and accountability and fiscal restraint would favor driving up the deficit by welching on our bills.

2. Raising the Debt Ceiling Is Necessary Under Every Budget Plan

Underscoring that point is this simple fact: the debt ceiling must be raised under every budget plan that’s out there—Obama’s, the House Republican plan authored by Rep Paul Ryan, R-Wisconsin, or the “reforms” proposed by deficit commission co-chairs Alan Simpson and Erskine Bowles.

According to the Washington Post, Obama’s budget outline would require borrowing an additional $7 trillion over the next decade, while the Republicans’ disastrous plan would require the government to borrow $5.5 trillion over that same period. Either way, the limit has to be raised in order to govern this country.

3. Nothing Happens When the Debt Ceiling is Reached

A common misperception is that failing to raise the debt limit will lead to a government shutdown. But as Stan Collender notes, reaching the ceiling is somewhat like maxing out your credit cards. When it happens, you don’t sit home in the dark doing nothing; instead, you might borrow some money from a friend, not pay some bills until the next paycheck or sell off some of that junk in the garage. Similarly, the federal government has a variety of moves it can make to keep things running in the near-term.

As Collender writes:

The federal debt ceiling has virtually nothing to do with whether federal departments and agencies continue to operate. Borrowing is just one of the ways the federal government finances its activities, and not increasing the debt ceiling only eliminates one of them. The talk about the government being shut down if there’s no increase in the debt ceiling when the current level is reached in the next few months is either a gross misunderstanding of how the federal budget world works or a scare tactic. The first is merely unfortunate; the second is absolutely infuriating.

So, national parks would stay open, government workers would still go to their jobs and the federal government would continue to spend what Congress authorized it to spend. If the standoff were to drag on until the government runs out of moves, it could still spend the $150 billion or so in revenues it takes in each month.

4. Not Paying Our Debts Is Unconstitutional

Another irony in this fight is that it’s being propelled by the GOP’s Tea Party base, which claims to have an unwavering fealty to the Constitution, one that at times approaches a fetish. But according to attorney Thomas Geoghegan, it is actually unconstitutional for Congress not to honor the debt it creates.

It has the power to authorize as much spending and raise as much in taxes as it pleases, but the 14th Amendment says that “the validity of the public debt, authorized by law…shall not be questioned.”

Geoghegan notes that the “Founders [were in a] panic over default on the public debt,” and suggests they took pains to make sure future Congresses wouldn’t play these kinds of games. “The preamble,” he wrote, “might well read: ’We the Creditors of the various States.’ In the beginning, the Constitution was a document of the creditors, by the creditors and for the creditors.”

He adds that defaulting on our bonds would likely violate the Fifth Amendment’s “takings clause.”

Default would essentially be a taking of property—the bondholders’—without due process of law. No Treasury bond reads “subject to the debt ceiling.” The Fifth Amendment is supposed to be the darling of the Federalist Society. Where is it on this one?

5. The Debt Ceiling Is a Proven GOP Tool for Extortion

Ezra Klein notes that in 1979, the House did away with the debt ceiling, passing a sensible rule that automatically raised the debt ceiling according to whatever Congress authorized in spending and raised in taxes. But “in 1995, House Republicans wanted leverage over President Bill Clinton, so they brought the debt ceiling back.”

According to David Min, that year they held the debt ceiling—and the larger economy—hostage, demanding “major planks of the radical ’Contract with America’ proposed by the Republican Party, such as a $270 billion cut to Medicare, steep cuts to education funding, and massive deregulation measures.” If that sounds familiar, it should. Majority Leader Eric Cantor, R-Virginia, told Fox News, “there comes at times leverage moments, a time when the president will capitulate to” the right’s demands.

The 1990s stand-off dragged on, causing a lot of real-world pain and two government shut-downs which would bloody the GOP’s nose. As Min notes:

The “1995-’96 debt ceiling crisis,” as it is known, caused significant turmoil for our economy, forcing the Department of Treasury to suspend all new debt issuances and causing two temporary shutdowns of all “nonessential” federal government activities, including a cessation of toxic waste cleanups, disease control activities, and a suspension of many law enforcement and drug control operations, among many others. Ultimately, this episode cost the American taxpayer over $800 million, and rattled the confidence of international investors in U.S. government bonds.

Indeed, it was only through the use of some fairly extraordinary measures by President Clinton’s Treasury Department, including a temporary use of retirement funds for former government employees, that the United States managed to avoid defaulting on its national debt during this period. Unfortunately, such measures would not be as effective today, as analysts at Deutsche Bank found. They worry that if it happened today the federal government would “not be able to stave off a government shutdown (or possible suspension of bond payments) for long.”

Debt Ceiling Fight Already Lost?

The Associated Press reported that “Obama acknowledged that he must compromise on spending with Republicans who control the House to avoid” an economic meltdown. “I think [House Speaker John Boehner is] absolutely right that it’s not going to happen without some spending cuts,” the president told the AP.

That’s a missed opportunity. This is an issue that can put a serious wedge between the economic elites who truly pull the GOP’s strings and its Tea Party base, and Democrats should pop some popcorn and let them fight it out, while constantly reminding the public that the looming disaster is the result of nothing more than political gamesmanship.

As Matt Yglesias noted, if the debt limit is reached, the White House will have discretion as to what bills get paid and who gets stiffed. “The right strategy,” he writes, “is to start stiffing people Republicans care about.”

When bills to defense contractors come due, don’t pay them. Explain they’ll get 100 percent of what they’re owed when the debt ceiling is raised. Don’t make some farm payments. Stop sending Medicare reimbursements. Make the doctors and hospitals, the farmers and defense contractors, and the currently elderly bear the inconvenient for a few weeks of uncertain payment schedules. And explain to the American people that the circle of people who need to be inconvenienced will necessarily grow week after week until Congress gives in. Remind people that the concessions the right is after mean the permanent abolition of Medicare, followed by higher taxes on the middle to finance additional tax cuts for the rich.

By accepting that negotiation is proper under the circumstances rather than standing firm—by conceding that holding the economy hostage to an unpopular ideological agenda—the Democrats appear to be passing up an opportunity to create their own “leverage moment.”

Copyright 2011 Joshua Holland

________________________________________________________________________

By arrangement with Alternet.Org.

Joshua Holland is an editor and senior writer at AlterNet.

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