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Posts Tagged ‘Debt Limit’

Five Key Facts about the House Debt Limit Bill

Posted in Budget, Politics, tagged , , , on January 22, 2013 | 8 Comments »

On Wednesday, the House will vote on a bill to delay the upcoming debt limit showdown. The bill includes no spending cuts, no tax increases, and no platinum coins of unusual size. Instead, it will “suspend” the debt limit through May 18 to give lawmakers time to pass a budget in each chamber. To give them extra incentive, it also includes a new twist: If they fail to pass a budget by April 15, it will withhold their pay.

Here are five things you should know about the bill.

1. The bill doesn’t just suspend the debt limit, it raises it.

Section 1(a) of the bill suspends the debt limit through May 18. You might think that the current limit would go back into effect on May 19. And it would, except for section 1(b) which increases the debt limit to reflect new debt issued between now and then.

The bill thus increases the debt limit by an amount to be determined later. That unusual structure lets lawmakers tie the debt limit increase to a specific date, rather than an amount. It also means they get to increase the debt limit, presumably by several hundred billion dollars, without having to expressly vote for such an amount.  It’s a less transparent, and therefore less painful, way to increase the debt limit.

2. Treasury can’t build up an enormous cash hoard.

In principle, Treasury could use this reprieve to build up a pile of cash before the new limit is determined on May 19. For example, Treasury could issue an extra $500 billion in debt and hold the proceeds as cash to cover deficits once the new limit is in place.

But the bill drafters already thought of that. To prevent such gaming, the bill limits the obligations that could be financed with new debt. An obligation isn’t covered “unless the issuance of such obligation was necessary to fund a commitment incurred by the Federal Government that required payment before May 19, 2013.” In short, no funny stuff.

3. Nevertheless, the bill could allow Treasury running room well beyond May 19.

We first hit the debt limit on New Year’s Eve. Since then, Treasury Secretary Geithner has raised cash by engaging in extraordinary (albeit now-familiar) measures such as stuffing IOUs into federal employee retirement accounts in place of the federal debt they own.

A big question is whether the bill would allow the Treasury Secretary to undo those extraordinary measures and reload for the next time we hit the debt limit. The folks at the Bipartisan Policy Center, who do a great job tracking the debt limit, believe that it would. If so, the bill would put off the day of debt limit reckoning well beyond May 19.

4. Because of a constitutional issue, the bill threatens to delay congressional pay, not eliminate it.

With prompting from the group No Labels, lawmakers had toyed with the idea of not paying the members of Congress if they fail to pass a budget resolution by April 15 (“No Budget, No Pay”). But that idea ran afoul of the 27th Amendment  (the weird one that was ratified in 1992 after passing Congress back in 1789). It says:

No law, varying the compensation for the services of the Senators and Representatives, shall take effect, until an election of Representatives shall have intervened.

To avoid “varying” the amount of compensation, the bill would escrow congressional pay until each chamber passes its budget or the end of the 113th Congress. In short, No Budget, No Pay Until January 2015.

5. Members of Congress don’t need to enact a budget to get paid on time.

The bill doesn’t require that lawmakers actually enact a budget. That would be a hard task, since it would require the Republican House to agree with the Democratic Senate on a budget plan.

Instead, the bill focuses on the first steps of the process, in which the House and Senate pass their own budget resolutions. If the House passes a budget, its members would get paid on schedule, and the same for the Senate (which hasn’t done a budget for several years). But there is no new penalty if the House and Senate can’t agree on a final budget.

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Treasury Puts the Kibosh on Platinum Coins

Posted in Budget, Politics, tagged , , , , , on January 12, 2013 | 1 Comment »

Ezra Klein reports an official statement from Anthony Coley, a Treasury spokesperson, killing the platinum coin strategy:

“Neither the Treasury Department nor the Federal Reserve believes that the law can or should be used to facilitate the production of platinum coins for the purpose of avoiding an increase in the debt limit.”

So R.I.P. platinum coins of  unusual size.

The administration has previously ruled out another oft-discussed debt-limit safety valve, overriding the limit based on the 14th amendment. So “Plan B” discussions will now move to two other alternatives that have been bandied about: prioritizing payments or, as Ed Kleinbard suggested the other day, issuing scrip like California did a couple years ago. Of course, issuing scrip *is* prioritizing payments, but with the added feature (or complication) of a written, transferable IOU.

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Debt Limit: Routine or the End of World?

Posted in Budget, Politics, tagged , , , , on January 9, 2013 | 2 Comments »

The debt limit in simpler times:

P.S. This is a repost from 2011.

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Is the Trillion-Dollar Platinum Coin Clever or Insane?

Posted in Budget, Politics, tagged , , , , , , on January 8, 2013 | 6 Comments »

Policy wonks are debating whether a trillion-dollar platinum coin would be a clever or insane way for President Obama to play hardball with Republicans in the upcoming debt limit battle. Here’s what you should know about this crazy-sounding idea:

1.     A legal loophole gives the Treasury Secretary apparently unlimited authority to mint platinum coins.

Treasury is forbidden from printing money to cover government deficits. Treasury must issue debt, while the Federal Reserve independently controls our nation’s monetary printing press.

That is exactly as it should be. But there is an arcane exception for platinum coins. To serve coin collectors, Treasury can issue platinum coins of any denomination. That creates an intriguing loophole: Treasury could bypass the collector market and mint a trillion-dollar platinum coin. By depositing it at the Federal Reserve, Treasury could keep paying bills after we’ve fully exhausted our borrowing limit.

2.     Most observers think this is a terrible idea, but the legal arguments against it are weak at best.

A who’s who of commentators has already objected to the coin on legal, economic, political, and image grounds (see, for example, John Carney, Matt Cooper, Tyler Cowen, Kevin Drum, Jim Hamilton, Heidi Moore, and Felix Salmon). I’m no lawyer, but the legal arguments seem wholly unconvincing. The language of the statute is clear, and in any case, the executive branch gets away with expansive actions in extreme times. During the financial crisis, for example, Treasury aggressively interpreted its authorities in order to bail out GM and Chrysler and to backstop money market funds. If default became a real possibility, the same expansiveness could easily justify a platinum coin.

3.     The economic arguments against the coin are stronger but manageable.

There’s a good reason that Treasury is forbidden from printing money to pay our debts: inflation. Many economies have been ruined when profligate governments turned to printing money. But minting the platinum coin needn’t mean monetizing our debt. The Federal Reserve has ample ability to offset any inflationary impact by selling some of the trillions in Treasury securities it already owns. As long as the Fed does its job, inflation would not be a risk.

4.     The best arguments against the platinum coin involve image and politics.

Minting a trillion-dollar coin sounds like the plot of a Simpsons episode or an Austin Powers sequel. It lacks dignity. And despite modern cynicism, that means something.

It would also be premature. President Obama and the Republican and Democratic members of Congress have roughly two months to strike a debt limit deal. There is no reason to short-circuit that process, as painful as it may be, with preemptive currency minting as the now-famous #MintTheCoin petition to the White House suggests.

5.     Nonetheless the platinum coin strategy might be better than the alternatives if we reach the brink of default.

Analysts have considered a range of other options for avoiding default, including prioritizing payments, asserting the debt limit is unconstitutional, and temporarily selling the gold in Fort Knox. All raise severe practical, legal, and image problems.

In this ugly group, the platinum coin looks relatively shiny. In particular, it would be much less provocative than President Obama asserting the debt limit is unconstitutional. That nuclear option would create a political crisis, while a platinum coin could be a constructive bargaining chip. As Josh Barro notes, President Obama could offer to close the platinum coin loophole as part of a deal to raise or eliminate the debt ceiling.

6.     If necessary, Treasury should mint smaller platinum coins, not a trillion-dollar one.

A trillion-dollar coin is eye-catching and ridiculous. That’s why it’s filled the punditry void left by the fiscal cliff. But a single coin makes no policy sense. No federal transactions occur in trillion-dollar increments.

Among the largest transactions are Treasury bond auctions, which today raise about $25 billion at a time. If necessary, Treasury could issue individual $25 billion coins, each in lieu of a needed bond auction. Still ridiculous, to be sure, but less so as it would calibrate coin issuance to immediate financing needs.

Steve Randy Waldman suggests as even more granular approach: issuing coins denominated in millions not billions. Such “small” denominations would be even less ridiculous and could potentially be used in transactions with private firms, not just Fed deposits.

Of course, the best path would be a bipartisan agreement to increase the debt limit, address spending cuts, and strengthen our fiscal future, all settled before the precipice. If we reach the brink, however, minting million- or billion-dollar platinum coins would be better than default.

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Spain’s 1575 Default

Posted in Budget, History, International, tagged , , , , on August 1, 2011 | 2 Comments »

If all goes according to plan, the hoopla over the debt limit will soon recede. Policymakers and analysts will move on to the next new thing. And, sadly, some fascinating questions will forever go unanswered. For example, which president would appear on the trillion-dollar coin?

 But if you are up for one last article about default, yesterday’s piece by Christophe Chamley at Bloomberg is a good one (ht: Donald M.). Chamley recounts Spain’s intentional bond default way back in 1575:

Spain, at the time, was the world’s sole superpower. Contemporaries described it as an empire “over which the sun never sets.” Yet the king needed the cities’ consent to borrow at a reasonable rate. And he needed it for a reason: The cities collected the taxes.

Each of the 18 main cities of Castile levied a special tax earmarked for long-term debt service. The level of this tax was set every six years through negotiation with the king. Tax collections were used first to pay off local long-term bondholders, with the rest sent to the central government. The local long-term bondholders were, in large part, the elderly living in the area. So local taxpayers realized that if they didn’t pay, their parents would be hurt. Thus, this precursor to Social Security had an effective enforcement mechanism — the ire of the elders.

But the king could only exploit this confluence of interests so far. The Cortes set the earmarked tax rate by majority rule, and that limited the king’s issuance of what were, in effect, his AAA securities. The king also issued other bonds secured by other, non-earmarked revenue. These securities were of a lower grade and sold at lower price.

Thanks to Philip’s expensive military adventures in the Netherlands and the Mediterranean, Spain’s debt had reached half of gross domestic product by 1573. At that point, the cities balked at paying higher taxes. For the next two years, they refused to budge in their confrontation with the king.

Finally, in September 1575, Philip took a circuitous route to outmaneuver the Cortes. He suspended payments not on the long-term debt, but on the short-term debt, which was owed primarily to Genoese bankers. The people cheered. Resentment against bankers ran as high then as now — perhaps higher, because the bankers were foreigners. The upshot, however, was default and a full-blown credit crisis.

 And then what? Well, as Chamley recounts, it wasn’t pretty.

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Debt Limit: Routine or the End of the World?

Posted in Budget, Politics, tagged , , , on July 29, 2011 | 2 Comments »

Well, it certainly isn’t routine this time.

Life was much simpler on the West Wing:

This is a repost from May.

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Raise the Debt Ceiling Rap

Posted in Budget, Macroeconomics, tagged , , , , , on July 26, 2011 | 2 Comments »

Today’s humor break: Remy does the Debt Ceiling Rap (with some asides about monetary policy):

Best line: “I got a monetary plan, and it involves a lot of toner.”

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Let’s Eliminate the Debt Limit

Posted in Budget, Politics, tagged , , on July 18, 2011 | 10 Comments »

My latest column at the Christian Science Monitor:

America’s leaders need to get to yes on a budget deal – one that marries substantial deficit cuts with a much-needed increase in the debt limit.

But that’s not enough. Rather than merely increasing the debt limit, we should eliminate it.

I realize that sounds strange. With all the Sturm und Drang in the budget talks, you might think that the debt limit is essential to controlling Washington’s profligate ways. It’s not.

Washington has other tools for managing its finances. The annual budget process includes a series of steps by which Congress decides how much to spend and to collect in taxes. Those decisions determine the size of America’s deficits and debt.

That simple fact often gets lost in the debate, so let me say it again: When Congress decides how much to spend and how much to tax, it is also deciding how much to borrow.

Unfortunately, the debt limit allows lawmakers to pretend that they can separate the two. Members routinely try to wrap themselves in the flag of fiscal responsibility by voting against debt limit increases. In most cases, though, those members have also voted for spending and tax policies that make those debt increases necessary.

Votes on the debt limit thus usually reflect raw politics, not substantive policy differences. Everyone knows that the debt limit has to rise. But they also know that voters hate debt. So law-makers jockey to see who can win the right to vote no and who must bear the burden of voting yes.

Democrats opposed debt limit increases when President George W. Bush was in office and Republicans controlled Congress. Republicans returned the favor under President Obama and the Democratic Congress. The only times we’ve seen hints of bipartisanship are when, as now, divided government has placed some responsibility on both parties.

A larger problem is that the debt limit institutionalizes risky brinkmanship. In divided government, both parties must agree to raise the debt limit. If they don’t, the United States can’t pay all its bills. We might even default on our debt. That’s the economic equivalent of driving over a cliff.

Both sides would regret that outcome. But they face very different incentives. The party that holds the White House has to make sure that the government functions. That’s why Treasury Secretary Timothy Geithner has repeatedly warned Congress about the damage that would result if the debt limit isn’t raised in time.

But the opposing party wants to extract the highest possible price for agreeing to more debt. So they have to act as though hitting the limit is no big deal. That’s why many Republicans have been discussing the potential to prioritize payments (putting interest first), and some have flirted with endorsing temporary default.

The problem with that strategy is that negotiations can fail, prioritization might not work, or we might be surprised with a sudden need for funds. In short, we might accidentally go over the brink.

Even if we don’t, dancing on the edge is costly. Alone among major nations, the US talks openly about the possibility of default. Financial markets usually discount that rhetoric as mere politics. As the deadline nears, however, that rhetoric will sow doubt in financial markets, inspire warning shots from credit-rating agencies, and potentially increase our borrowing costs.

There’s no reason to subject ourselves to those needless costs. The debt limit is an anachronism. Congress should eliminate it.

P.S. In conjunction with the eliminating the debt limit, I would strengthen the existing budget process along the line the Bipartisan Policy Center’s SAVEGO proposal. We do need budget procedures to force action, just not the brinkmanship of the debt limit.

P.P.S. Reuters reports that Moody’s is also recommending the elimination of the debt limit.

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Spending in Disguise

Posted in Budget, Politics, tagged , , , on June 29, 2011 | 3 Comments »

Republicans are demanding a deficit-reduction package that’s entirely spending cuts. Democrats insist that revenues must also be included.

Are these positions completely irreconcilable? Not if both sides are willing to attack the spending hidden in our tax code.

I explore this idea for finding common ground in a new essay in National Affairs, “Spending in Disguise”:

A great deal of government spending is hidden in the federal tax code in the form of deductions, credits, and other preferences that seem like they let taxpayers keep their own money but are actually spending in disguise. Those preferences complicate the code and often needlessly distort family and business decisions. Their magnitude raises the possibility of a dramatic reform of the tax code—making it simpler, fairer, and more pro-growth—that would amount to both cutting spending and increasing government revenue at once, and without raising tax rates. 

Such a reform would not eliminate the need for serious spending cuts, of course, nor would it take tax increases off the table. But it could dramatically improve the government’s fiscal outlook and make the task of budget negotiators far easier. It will only be possible, however, if we clearly understand how spending is hidden in the tax code and what reformers might do about it—if we see that tax policy and spending policy are not always as distinct as we might think.

In short, there is a deal to be done in which revenues go up solely because spending in the tax code goes down.

The trillion-dollar question is whether President Obama, Speaker Boehner, and Leader Reid can cut that deal by August 2nd. If not, one side will have to cave on a core principle (no prize for guessing which party that’s likely to be), or we will find out just how painful it really is to run out of fresh borrowing room.

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Playing with Fire with the Debt Limit

Posted in Budget, Finance, Politics, tagged , , , , on June 24, 2011 | 4 Comments »

My latest column in the Christian Science Monitor:

America sometimes takes its exceptionalism too far.

Case in point: We are the only major economy that talks openly of default.

Government debt has ballooned throughout the developed world in the aftermath of the Great Recession. France and Britain are as deep in debt as the United States, for example, and Japan is much further in the hole.

But their leaders never mention the possibility of default. Why would they? If you have the ability to pay your bills, there’s no reason to scare your creditors.

But that’s exactly what we do in America. Treasury Secretary Timothy Geithner has been warning about the risks of default since January.

If we don’t increase the debt limit by early August, he tells us, default becomes a real possibility. And that could pose grievous risks to our already weak economy.

Many Republicans play down that risk. Echoing famed investor Stanley Druckenmiller, some argue that a temporary default would be acceptable if it’s part of a larger political strategy that brings future deficits under control.

But that is a dangerous game.

Large swaths of America’s financial infrastructure have been built on the assumption that US Treasuries pay on time. And financial markets would likely punish the US with higher interest rates if we defaulted. That’s what happened in 1979, for example, when back office snafus caused Treasury to unintentionally miss payments to some investors.

This time, Fitch, Moody’s, and Standard & Poors are threatening to cut the US credit rating if we choose to default. Given the risks, most observers recognize that default is not, and should not be, an option. The US is not a deadbeat nation.

But does that mean the debt limit has to go up in early August? Some Republicans say no because of a simple fact: Every month, the federal government collects more in taxes than it pays in interest. With careful cash management (which would likely have to start before the August deadline), Mr. Geithner should be able to prioritize debt payments and thus avoid debt default.

As best as I can tell, that argument is correct, but it’s hardly a reason for complacency. America is currently spending about $100 billion more each month than it collects in revenues. If we hit the debt limit, we won’t be able to pay everyone who is rightly expecting to be paid.

Geithner can and should ensure that our debtholders get paid.

But someone – perhaps millions of someones – won’t be paid on time. Contractors, federal workers, program beneficiaries, or state and local governments will suddenly find themselves short on their cash flow.

That won’t be good for the economy. Even though it’s not as bad as debt default, it still would paint the US as a deadbeat.

The US faces severe fiscal challenges in the years ahead. It’s perfectly reasonable that lawmakers want to combine an increase in the debt limit with efforts to rein in future deficits.

But that worthy goal should not weaken our commitment to paying – on time and in full – the obligations that we have already incurred.

As the debt limit draws near, our leaders should stop playing with fire and craft instead a plan to rein in future deficits without threatening our struggling recovery.

That’s a difficult balancing act, requiring tough compromises across the political spectrum. But as everybody knows on Capitol Hill and beyond, it would be the best step for the nation and our fragile economy.

It would also be exceptional.

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