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The scary new chapter of America’s 223-year love affair with debt

By Matt Phillips

America might have too much debt for its system to cope with.

No, not the financial system. Sure, at $16.7 trillion, the US government has a lot of debt. But despite what you might hear, America is not bankrupt, any more than a homeowner with a mortgage is bankrupt. In fact, thanks to healthy buying from Japan, China and the US Federal Reserve—not to mention a worldwide scramble by investors in search of safe places to put money—the US can easily and cheaply borrow any money it needs to meet its obligations.

No, the system we’re talking about is not the financial system—it’s the democratic system. Maybe America’s awesome ability to take on debt is actually weakening the country’s willingness to pay it back. And maybe that’s why the nation’s hard-won reputation as a near-pristine borrower is starting to crumble in what may be an unsettling new chapter of America’s 223-year relationship with government debt.

Ability and willingness

First things first. A country’s reputation as a borrower is largely built on two things: ability to pay debts, and willingness to pay.

As we said above, the US has the ability to pay. But willingness? That’s a political issue.

Defaults by countries that were perfectly able to pay their debts have a long and rich history. A study of almost 170 government defaults dating back to the Napoleonic era showed almost 40% took place when economic growth was strong. That suggests that at least some were driven by politics rather than economics. “Many of these seemingly inexcusable defaults occurred when political upheavals brought new coalitions to power that favored default for opportunistic or ideological reasons,” the authors of the paper wrote.

There’s been just such an upheaval in the US, where a hardline Republican coalition—the Tea Party—gained influence after Barack Obama’s 2008 election. Brinkmanship driven by the Tea Partiers has repeatedly pushed the US closer to default than many would have ever thought possible. The last showdown, in the summer of 2011, prompted rating agency Standard & Poor’s to strip the US of its AAA rating. Fitch threatened to do the same this week, just before Republican leaders relented and allowed Congress to push through a bill to raise the debt ceiling and reopen the government.

For the record it’s only a small—albeit vocal—minority of Americans who don’t seem to recognize the obligation to repay debts the US has incurred throughout its history. When the Pew Research Center queried people during the US debt fight in the summer of 2011, some 23% of respondents said lawmakers who shared their political views—whatever those were—shouldn’t cave into pressure from the other side, even if it meant defaulting on the debt. A separate set of polling on attitudes toward default seems to put levels of support for default somewhere between 10% and 20%.

But with or without public support, the US seems to have embarked on a new path in its fiscal history that seem to threaten its cherished reputation as a borrower. “The repeated brinkmanship over raising the debt ceiling … dents confidence in the effectiveness of the U.S. government and political institutions, and in the coherence and credibility of economic policy,” wrote analysts with Fitch.

How did we get here? To figure that out, we have to take a look at America’s history as a debtor.

Blame the Dutch……… Read more: Here

The President’s Legal Authority at the Debt Limit

By Andrew Kloster

Some time between the middle and the end of October, the federal government will reach a hard limit on the amount of debt it can issue, and its ability to finance governmental operations will be affected. Confusion about the debt limit abounds, and this Issue Brief will address some common questions.

What Is the Debt Limit?

The United States debt limit, or debt ceiling, is the statutorily defined amount of debt the U.S. Treasury can issue, either by borrowing from the public or issuing an intragovernmental receipt to special accounts, such as the Social Security or Medicare trust funds.[1]

The Treasury Department has to have liquidity, or cash on hand, to disburse the funds necessary to meet its contractual obligations. The federal government maintains this liquidity by managing governmental receipts (such as income tax payments) and selling debt (such as Treasury bonds).

Will a Government Shutdown Occur If the Debt Limit Is Not Raised?

The debt limit is often confused with the expiration of appropriations bills. Reaching the debt limit is distinct from a government shutdown. A government shutdown occurs when appropriations authorization expires: Unless there is a law saying that money may be spent on a project, money may not be spent on that project.[2] A debate over an appropriations bill is a debate over whether to fund a specific government function. When the government shutdown began, only certain statutorily defined “essential” government functions have continued to operate.[3]

The debate over the debt limit, however, is a debate over how to finance governmental operations—reaching the debt limit would not force a government shutdown. Currently, the debt limit is $16.699 trillion.[4] The federal government reached this limit on May 19, 2013, and Treasury has since used statutorily allowed “extraordinary measures” to avoid issuing additional debt and still have the cash on hand to finance day-to-day operations. When the Treasury exhausts these extraordinary measures, the federal government will continue operating. However, the President might decide that federal employees, for example, will not necessarily be issued checks available to cash immediately.

Even without the ability to issue additional debt, the government will continue to accrue legal obligations; it will simply not be able to immediately liquidate (pay cash for) those obligations.[5]

What Happens to the U.S. Debt If We Reach the Debt Limit?

It is impossible to tell what would happen if the debt limit is not raised.[6] If Congress and the President are unable to reach an agreement on raising the debt ceiling, markets and credit rating agencies might interpret this negatively as unwillingness of the U.S. government to honor its obligation. If the President chooses to default on all obligations rather than a few (discussed below), this could exacerbate the problem. Market perception of U.S. sovereign debt directly affects bond yields (interest rate paid) on U.S. debt, so decisions the President makes can actually save or cost the government money in the long term.

The Prompt Payment Act[7] provides that the “temporary unavailability of funds to make a timely payment” does not excuse delayed payment and that the government is responsible for paying interest charges on such delayed payments. Over time, these interest penalties capitalize, so the federal government ends up paying compound interest. Depending on how the President manages payments, statutory interest payments may be greater or smaller.

What Would the President Prioritize?

While there have been proposals to cabin the authority of the executive to prioritize payments,[8] as it stands there is no statute governing how to manage government finances past the debt limit. Since governmental obligations would exceed receipts, exceeding the debt limit logically implies that at least some obligations would be delayed. These obligations would thus, by definition, be in default. There is no general “governmental default” past the debt limit; default would occur with respect to specific obligations that the President chooses not to prioritize.

There are constitutional backstops on the President’s otherwise plenary authority to prioritize payments.[9] Of these, the most important is that the President may not prioritize payment in violation of the Due Process Clause of the Fifteenth Amendment. He may not, for example, choose to pay the salaries of federal employees of one race before paying the salaries of federal employees of another race. Subject to this limitation, the President’s prioritization choices are essentially unbounded.

The President could, of course, play a game of political brinksmanship and fail to pay any obligations until the debt ceiling is raised. He could argue that all obligations are on an equal footing and that prioritizing payments violates some principle of fairness. Former Treasury Secretary Timothy Geithner made statements about the political unworkability of prioritization in the past,[10] but to date, Treasury has not disavowed its legal authority in this area. Failing to prioritize debt obligations would have far-reaching consequences, however, including potentially increasing the cost of servicing the debt long after the debt limit crisis ends.

Further, to the extent that this situation would involve having cash on hand and failing to pay some receipts, this option implicates the Congressional Budget and Impoundment Act of 1974, which prevents the President from deferring any “budget authority.” This phrase is defined to include “borrowing authority, which means authority granted to a federal entity to borrow and obligate and expend the borrowed funds.”[11] Holding cash until such time that the Treasury can meet all of its payments necessarily includes deferring expenditures of borrowed funds until such time as the debt ceiling is raised, which would implicate these statutory limitations.[12]

The President could also choose to continue payments for “essential” services analogous to those defined in the appropriations context.[13] There is no statutory requirement for this decision, but the idea that there are “core” functions of the federal government that ought to remain liquid is easily understandable. Meeting debt obligations and paying military personnel might be prioritized at the expense of other obligations, such as issuing certain grants and loans to private-sector firms and to state and local governments, for example. So-called mandatory spending, such as Social Security payments, do continue during a government shutdown, but they need not be prioritized at the debt limit.[14]

The President could also pick and choose among programs he likes and those he does not like. He might direct Treasury to pay Department of Defense employees before Department of Education employees, or vice versa. Whatever decision he makes would be essentially unchallengable in court.

Ultimately, however the President chooses to manage payments, delays will accumulate and worsen until either spending is cut or the debt ceiling is raised.

Broad Authority

In brief, the President has broad authority to manage government payments to avoid defaulting on federal obligations. He can choose which payments to make and in which order, and these choices will impact the effects on the average U.S. taxpayer and the economy.

—Andrew Kloster is a Legal Fellow in the Edwin Meese III Center for Legal and Judicial Studies at The Heritage Foundation.

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Cartoon of the Day: “Well, here we go again!”

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