Maybe it is a certain ignorance about double-entry bookkeeping, but the conversation about the debt ceiling throughout the past week seemed strangely off the point.
The debt ceiling law in force since the 1917 Second Liberty Bond Act meant that the revenue side of the budget enacted by Congress could not be topped up by debt in the amount that Congress expected when it passed the budget. With no increase of taxes and no increase in the debt ceiling, revenues would be insufficient to meet expenditures.
Under these circumstances failure to increase the debt limit would constitute a last-minute change of mind by Congress about the government's revenues without a corresponding decrease on the other side of the balance sheet for the government's expenditures.
The verbal association between "debt ceiling" and the "national debt" turned the conversation toward only one line on the expenditure side of the budget. The common fear was that the gap between government's revenues and expenditures "risked defaulting on its national debt for the first time in its history."
This was only one possibility, and not even the most likely possibility. The national debt is of two kinds -- public debt and intergovernmental debt to Trust Funds like Social Security. The latter is irrelevant because the government does not pay back the Trust Funds, it keeps borrowing from them. The public debt would be the least likely default because that would cause the interest rate on new debt to rise. The government does much more than just pay interest on its public debt, as reflected in the many more lines on the expenditure side of the budget.
Money is borrowed for more purposes than just debt service. There are salaries, government contracts, procurements and other expenditures that have noting to do with debt service.
Rather than aim at those other budget expenditures, Obama aimed his red pencil at some expenditures that were not even directly related to the budget, such as the non-budget Social Security payments which are funded out of Social Security revenues, not general revenues, and certainly not financed by the national debt. The President does not head these trust funds and has no power to touch them at all.
Social Security pension payments are not an expenditure of the government. The government owes substantial amounts to the Social Security Trust Fund, which it is not paying. Medicare is the same. Congress could reduce payments from those Funds to their beneficiaries. In that case, more money would be available from the Funds for the government to borrow. "Borrow" may be used here in the sense of "steal," since there is likely no intent to ever pay it back.
Faced with two inconsistent laws -- a budget with a certain level of expenditures, and a debt ceiling that denies the funds to make those expenditures, a President would need to make decisions as to which of the expenditures would not be paid, unless Congress first took action to bring expenditures into line with revenues. Every president has had that power since 1917.
What seemed to be missed in most discussions of the debt ceiling fracas is that every line in the budget that is funded by general revenues and debt could have been legitimately attacked by Obama's red pencil, without needing to negotiate any deal. All he had to do was tell Congress to make the cuts or he would -- if necessary -- have to do it himself. And there is no reason he could not have rounded out that message by letting Congress know he would veto any budget cuts that he did not like.
That raises the important question: Why, after almost 100 years, President Obama happens to be the first president that had occasion to capitulate to demands by one house of Congress in order to obtain a debt-ceiling increase to match the revenues previously budgeted by Congress?
Is the reason that the 2011 Republican team experienced a 100-year flood of intelligence and political skill that led only them -- in all this time -- to understand the political leverage this law provides to blackmail a president into capitulation? Not likely. The debt ceiling has been increased over 70 times since it was enacted. Over the years this debt ceiling has been routinely increased. It was not suddenly smart Republicans, but Obama himself that caused this theatrical exercise.
Congress has never failed to raise the debt ceiling, sometimes after a little theatrical grumbling, because that would hand the president a red pencil to cancel programs at his own will in order to free up funds to pay off current obligations. This would be in effect a line-item veto that no Congress would give a President because it would hand him power to punish his enemies by canceling items in the budget that they support. For example, that new bridge planned for Michele Bachman's district.
What happens if the government defaults on its obligations to an entity such as Boeing or Lockheed Martin on a defense contract? The contractor would take out a commercial paper loan, and secure it with its receivables from the US. It is the same with other contractors. They would go out and raise money in the market on the security of their claim for payment, even if late, from the government...Agribusiness subsidies, subsidies to oil companies, and so forth where there is no obligation to pay, could be left unpaid because the money was effectively unappropriated by Congress to fund them. Contracts that are never made, need never be paid. Others would be paid once money comes available from canceling other programs. Obligations are made and obligations are paid every day by the government. By not making new obligations, money becomes available to pay those that are overdue.
Why would Obama not want such power? Because he could not use this power to serve Wall Street and the MIC by cutting expenditures that he controls. For that, he needed Congress to cut, or set up a process that will result in cuts to, Social Security and Medicare Trust Fund expenditures. These he could not reach with that red pencil that would have been given him by failure to raise the debt ceiling, because they are not funded by debt..
In the debt deal of 2011, Obama was the perp, not a victim, in going after what he calls "entitlements." He needs to borrow more of those regressive Social Security taxes in the Trust Fund to fund those tax cuts for the rich that he approved during the similar "bipartisan surrender" negotiations he conducted on the budget last year. The tax-cut deal last year was just as politically unnecessary as the debt-ceiling surrender this year - except for the politics of money to fund Obama's re-election. After all, it is a share of those tax cuts, now funded by his debt ceiling deal, that will kick back from the New Gilded Age plutocrats to fund his campaign. No way he would have been paid a cut of anyone's social security or medicare had he used his power to cut corporate pork instead.
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