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Constitutional education, history, commentary, reform, compliance, and interpretation.

2013/10/09

Government shutdown and debt ceiling FAQ

There have been a number of Frequently Asked Questions pages posted on the Net concerning the government "shutdown" and debt ceiling, which provide commonly conceived "answers", but it seems fitting to provide some more constitutionally enlightened answers to some of those questions:
  1. If there is no congressional appropriation, how can the government keep spending money on "essential" operations? Constitutionally, it can't. There is no constitutional exception for "essential" operations. If government complied with the Constitution, it would have to shut down all spending and proceed entirely using unpaid volunteers, as it did in the beginning.
  2. How can some spending be outside the appropriation process? Constitutionally it can't. It is done on the rationalization that the Constitution does not explicitly forbid setting up "independent" agencies that may be "self-funded" from their own taxes or fees, or forbid multi-year appropriations for other than the Army, but the Constitution doesn't authorize those things, either, and one cannot logically infer a power from the omission of a prohibition on its exercise. The design established by the Constitution requires all revenues go into the Treasury, and all disbursements to be made under appropriations that may not extend beyond the terms of Congress, which are two year periods.
  3. Why can't government workers volunteer? Constitutionally, there is no authority to stop them from doing so, although there is a 19th century criminal statute that forbids it. The statute could constitutionally forbid volunteers to use government-owned assets, but the only authority to forbid voluntary action would be to fire them, and they could then volunteer as non-employees using their own resources. Of course, if government prosecutors are "furloughed" there would be no one to enforce the statute. Somehow, one suspects it is a dead letter.
  4. So who is to blame for the shutdown? The Constitution requires agreement by both houses of Congress and the President to authorize spending, from one year to the next, and does not authorize "permanent" appropriation for anything, so the default is to not spend and the fault belongs to those who insist on spending over the objections of one of the other components, in this case the House of Representatives, which has superior authority as the only house that may initiate spending bills. The compromise position would be to cut all spending not agreed to by all the components.
  5. Why would the government "default" if the debt ceiling is not raised? Depends on what you mean by "default". The way most economists use that term, it would only be failure to pay interest on lawful bond debt, and principal on such debt when it comes due, and there is more than enough revenue from taxes, about $200 billion/month,  to pay bond debt coming due at about $20 billion/month, so from that viewpoint, there is no risk of "default" if the debt ceiling is not raised, although there could be delays in payment of a few days. However, the way the Administration and its supporters in Congress are using the term, it is any and all obligations or expectations of payment, from payment of medical claims on Medicare to vendors of goods and services to subsidies and grants to key constituents. That is a matter of not wanting to incur the political costs of ending patronage.
  6. What would happen if the debt ceiling were not raised? The government would have to immediately stop all spending in excess of revenues, which would be a reduction of about 30%. That would mean ending almost all entitlement spending, on things like Medicare, Medicaid, farm subsidies, food stamps, housing subsidies, education subsidies, and payments to government-funded pension funds. Arguably Social Security benefits could continue as long as enough FICA taxes were collected, but if those taxes are not keeping up with benefits, those benefits would have to be reduced to stay within receipts, or further applications not accepted. Advocates of more spending and borrowing make the Keynesian argument that a sudden cutoff would be disastrous to the economy. There would almost certainly be a shock from any sudden change in government spending, and many enterprises that have grown to depend on it might go bankrupt, but reduced government borrowing would also make more investment funds available to other things, like expanding businesses, creating jobs, and investing in new technologies, so after a period of adjustment, the net effect is likely to be beneficial to the economy.
  7. How many federal workers would have to be laid off?  The number is unclear, but it could be less than 800,000 (about as many as were recently furloughed as "nonessential"), and if civil service and union protections were reduced, that could be of unproductive workers, so that there would be no impact on work actually done. If many salaries were reduced instead of just terminating workers, the savings could be even greater. That might conflict with some union contracts, but those could be legislatively abrogated. In the demobilization following WWII the number of service personnel was reduced from more than 12 million to about 1.56 million in less than a year, and the economy was able to absorb them, despite cutbacks in wartime production. Of course we have a different economy now, less able to absorb many kinds of government workers, but most of the loss would be borne by benefits recipients and vendors of services to them. Medical facilities and some large farming operations might be hard hit, but they could be helped to restructure. Critical patients would still receive care if such care would prolong life for years, but their quality of life and life expectancy might diminish. More people might need to share housing. Many people would have less money to spend, and thus demand would be reduced, but they would also work for less. Many homeowners might be reduced to renters.
  8. Has this country ever defaulted? There have actually been at least three major defaults in our history: Following the War for Independence about 1790, during the Civil War about 1862, and during the Depression in 1933. Arguably the "Nixon shock" of 1971, abrogating the Bretton Woods accords, was a fourth default. All resulted in payment in paper "money" instead of gold or silver, and was tolerated only on the implied understanding that the growth of the supply of fiat currency would be limited to match economic growth. By constitutional standards, we are already in default, and have been for some decades. Printing debt-based currency to pay debt that was expected to be paid with something else, is default, and we are likely to continue to do that, even if the result is hyperinflation. 
  9. So would such a sharp reduction in federal spending cause a recession, or worse?  Not if it is planned and managed well. World financial markets don't care if we reduce subsidies to nonproductive people, only if we don't pay interest and principal on the government bonds that are used to back their own investments and currencies. Of course they have their own sovereign and derivatives debt problems, and the only way to avoid a catastrophic global collapse is to manage an orderly write-down of financial assets, perhaps down to only a few cents on the dollar. The only alternative to having almost all investors wiped out completely is to have them all wiped out mostly. That would mean things like insurance and pension funds only paying a fraction of claims, and stock companies not paying dividends. But fractions are better than nothing. However, such a general write-down has never been managed on a global scale, and it is not clear how it could be managed without too many trying to evade the losses as free-riders.
  10. How fast could the national debt be paid off completely? We are paying about $240 billion/year on bond debt, which, because of current low interest rates, is largely going to reduce principal on the debt, so if we did no more borrowing, we could reduce the debt ceiling about $200 billion a year for the next several years, then increase the rate to about $500 billion a year until all of it is paid off. That would also inject that amount into the financial and productive markets, which would be likely to result in economic growth and more tax revenues. Other obligations are another matter. Support for consumption by the elderly and ill by a shrinking population of young producers cannot go on, so we are going to have to reduce the subsidies to the aged and ill and therefore their consumption of public resources. The only thing we can do about that is to invest in research and development of more effective and efficient ways to help those people, doing more with less. That means less for treatment and more for science.
See also:
  1. Proposed amendments, especially on appropriation and borrowing:
    1. Clarification of appropriation
      No expenditure shall be made, or obligation incurred or committed, by or for the government or any activity under its supervision, except within appropriations enacted by Congress, which shall specify the amount and the department or activity it may support, and which shall not exceed six years.
    2. Clarification of Article I Section 7
      The word "bills" shall include proposals within bills, and any proposal for raising or receiving revenues or disbursing funds, including for borrowing or lending, shall originate in the House of Representatives, and shall specify rates, amounts, objects, and purposes.
    3. Challenges to debt
      No debt by the United States or any department thereof shall be incurred or held valid that funds consumption by other than military personnel and militia personnel in federal service, or funds payment of principal or interest on existing debt; and any person may challenge the validity of any debt, whereupon the government shall have 20 days to prove it is authorized by law and not for consumption except as provided above, failing which the debt shall be deemed null and void.
  2. Appropriation must cover debt
  3. Debt is a bet
  4. A way around the debt ceiling
  5. So you want to raise the debt ceiling?
  6. Debt-based currency
  7. So what about a balanced budget amendment?
  8. Flaws in the Balanced Budget Amendment
  9. Don't Believe The Debt Ceiling Hype: The Federal Government Can Survive Without An Increase, Jeffrey Dorfman


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