Wednesday, January 30, 2013

More on H.R. 325 and Determining the Debt Limit on May 19

As I mentioned in my previous post on H.R. 325, it is not precisely clear how the new level of debt limit would be determined, and by whom, on May 19, assuming no intervening legislation and assuming H.R. 325 is enacted into law as passed by the House.  The language of the bill on this point reads:

“Effective May 19, 2013, the limitation in section 3101(b) of title 31, United States Code, as increased by section 3101A of such title, is increased to the extent that--
“(1) the face amount of obligations issued under chapter 31 of such title and the face amount of obligations whose principal and interest are guaranteed by the United States Government (except guaranteed obligations held by the Secretary of the Treasury) outstanding on May 19, 2013, exceeds
“(2) the face amount of such obligations outstanding on the date of the enactment of this Act.
“An obligation shall not be taken into account under paragraph (1) unless the issuance of such obligation was necessary to fund a commitment incurred by the Federal Government that required payment before May 19, 2013.”
Given fluctuating cash balances due to the mismatch in the timing of federal government receipts and expenditures, one possible way to determine the debt limit on May 19 is to take the net of the receipts and expenditures during the period beginning on the effective date of the legislation and ending on May 18 and adding that to the debt subject to limit at the beginning of the period. 

That may end up being what is done, if no new debt limit legislation is enacted before that date.  Another complication, though, has to do with trust fund transactions, such as Social Security. 

When Social Security payments are made at the beginning of each month, non-marketable Treasury securities in the appropriate trust fund are redeemed.  Those securities are subject to the debt limit, and the redemption lowers the amount of debt subject to limit. While Treasury does not match its security issuances to match particular expenditures, Treasury issuance of securities to the public is increased by the need to make Social Security payments. This increases the debt subject to limit. In addition, as Social Security tax receipts are received and invested in new non-marketable Treasury securities, the debt subject to limit also increases.   

It would seem that the most reasonable interpretation of H.R. 325 is that the redemption of Social Security trust fund securities would be offset by Treasury’s need to issue new debt to fund Social Security payments. The issuance of new securities to the Social Security trust funds as tax receipts and interest are reinvested would not count for purposes of determining the new debt limit, since these securities would not be issued to “fund a commitment…that required payment before May 19.”  

Since the trust funds in total are increasing the amount of Treasury securities that they hold, it would seem that the issuance of securities to all the trust funds during the period from the enactment of H.R. 325 and May 18 will be greater than redemptions.  In other words, this factor would contribute to Treasury exceeding the statutory debt limit on May 19 before Treasury takes “extraordinary measures” lowering the debt subject to limit. Treasury would need to take extraordinary measures to rollover existing debt as it matures and to raise new funds.

There would seem to be a more straightforward way to accomplish the apparent goals of H.R. 325. If the intent is to prevent Treasury from excessive borrowing during the period prior to May 19, it might have been simpler for H.R. 325 to state that Treasury could only borrow funds necessary to meet existing expenditures and to maintain a prudent cash balance. Then the new debt limit could be determined on May 19 by reference to the debt subject to limit but for the suspension on May 18.  One way to enforce the prudent cash balance requirement would be to subtract from the debt subject to limit on May 18 the amount Treasury cash exceeded a certain amount on that date for purposes of determining the new debt limit on May 19.  If Congress wants to net out the effect of the extraordinary measures in effect prior to the enactment of the law, they could add a provision to do that. The only reason for that, though, would be to lessen the amount of time Congress would have to raise the debt limit after May 19.

Thursday, January 24, 2013

The Debt Limit and H.R. 325: The “No Budget, No Pay Act of 2013”

Yesterday, the House passed H.R. 325, the “No Budget, No Pay Act of 2013,” which would suspend the debt limit through May 18. It also attempts to force both the House and the Senate to pass a budget by threatening to put the pay of the members of the chamber not passing a budget by April 15 into an escrow account until that chamber passes a budget or the last day of the current Congress, whichever comes sooner. 
The Treasury would be able to resume normal debt issuance to keep the government funded and would unwind the current “extraordinary measures” it has taken if H.R. 325 is enacted into law as currently written. On May 19, if Congress has not enacted additional debt limit legislation, the debt limit would be “increased to the extent that--

“(1) the face amount of obligations issued under chapter 31 of such title and the face amount of obligations whose principal and interest are guaranteed by the United States Government (except guaranteed obligations held by the Secretary of the Treasury) outstanding on May 19, 2013, exceeds
“(2) the face amount of such obligations outstanding on the date of the enactment of this Act.

“An obligation shall not be taken into account under paragraph (1) unless the issuance of such obligation was necessary to fund a commitment incurred by the Federal Government that required payment before May 19, 2013.”
Staff at the Bipartisan Policy Center (“BPC”), who have posted a useful explanation and analysis of H.R. 325, interpret this to mean that the increase in the debt would not include the securities issued to government trust funds when the extraordinary measures are unwound. They do not provide an explanation for this interpretation, but presumably the reason is that these securities, in their reading, would not be issued “to fund a commitment incurred by the Federal Government that required payment before May 19, 2013.” This seems to be a reasonable interpretation of the language.

Therefore, BPC staff reasons that the outstanding debt on May 19 would be higher than the new debt limit on that date by the amount of the extraordinary measures that are unwound by new security issuances once H.R. 325 is enacted into law. They further state that “Treasury will immediately either need to use some Extraordinary Measures to stay under the new limit or use cash on hand to redeem some outstanding debt.”
With regard to that last point, I am not sure that it is correct. The debt that Treasury issued during the suspension period would have been lawfully issued, and I believe that Treasury would not need to do anything immediately to reduce the amount of debt outstanding. However, Treasury could not issue new debt or rollover existing debt, because that would be debt in excess of the new limit. The usefulness of the extraordinary measures would be greatly reduced, though, because, these measures would provide room to borrow more funds only to the extent that they exceeded the amount needed to reduce the outstanding debt to the new debt limit.

Also, BPC states that the H.R. 325 would prevent the Treasury “from issuing large amounts of debt to the public in the days before May 19 to stockpile cash to pay bills that are due after May 19.” Donald Marron also comes to that conclusion. I am not sure, though, that this is strictly true, since there is no direct prohibition in H.R. 325 to doing this. But any amounts borrowed in excess of what was needed to fund current obligations would not increase the debt limit. On May 19, therefore, If Treasury followed such a strategy, the amount of the debt subject to limit would be greatly in excess of the new debt limit, which would mean that much of this cash would have to be used to redeem Treasury securities as they mature (there are T-bills maturing every week). In other words, there would not be much use to borrowing more than is needed.
This, however, points to another issue, the determination of the new debt limit on May 19.  For example, Treasury’s cash balances fluctuate day to day. How would an increase in the cash balance be treated? For example, Treasury might have to borrow to pay obligations coming due in early May, but its cash balance might increase by May 19 because of tax payments that have been credited to Treasury’s account. It is not clear how such issues would be resolved and who would have the responsibility to establish the new debt limit number.

But the ambiguities in the current language of H.R. 325 will probably not need to be resolved since the outcome of the upcoming sequester and Continuing Resolution battles will likely also involve a longer-term solution to the debt limit issue. Also, as many have noted, there is a Constitutional issue involving the Congressional pay issue and the 27th Amendment. My guess is that, if H.R. 325 is enacted as written, both the House and the Senate will pass separate budgets by April 15 and that the pay provisions will not be tested in court. Since the Senate and the House are unlikely to agree on a budget, this would seem to be largely symbolic.  

Thursday, January 17, 2013

Some Comments on the Debt Limit Impasse

This past weekend the Treasury, with assistance from the Federal Reserve, effectively ended discussion of the platinum coin proposal.  The idea was that Treasury could mint and deposit a large-denomination platinum coin (or coins) at the Fed in order to pay its bills if there were otherwise insufficient cash in the Treasury account at the Fed because of a debt limit impasse. The Treasury statement – “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” – was awkwardly written as sometimes results when statements are negotiated. It was clear enough, though, and accomplished the desired purpose. 

The Treasury had to stop the speculation that it would mint a platinum coin. Resorting to such a coin could prolong the debt limit saga indefinitely, create calls for the President’s impeachment, make the U.S. look ridiculous and ungovernable, and, consequently, cause negative market reaction and adversely affect the economy.  
Also, while Treasury does have the power to create money by minting coins, this would be at a much higher order of magnitude than anything done since the creation of the Federal Reserve System in the early twentieth century. The Fed could offset the money injected into the banking system as Treasury spent the funds it acquired from minting a platinum coin by selling Treasury securities from its portfolio. In essence, the Fed would be selling Treasury securities to the public rather than the Treasury. The platinum coin scheme, though, would muddy the line, already considerably blurred, between monetary and fiscal policy. It is no surprise that the Fed would be opposed to the minting of platinum coin as a way to keep the government funded. 

The Treasury’s platinum coin statement and Administration statements indicating that there is no other option than for Congress to raise the debt limit signaled that the White House was going to play hardball with Congressional Republicans on this issue. Administration officials even went so far as to call Paul Krugman, who has been a proponent of the platinum coin option and has worried that the Administration would not be tough enough with the Congress, to reassure him that they were not going to negotiate on debt limit legislation. Krugman wrote on his blog:  “Meanwhile, I get calls. The White House insists that it is absolutely, positively not going to cave or indeed even negotiate over the debt ceiling — that it rejected the coin option as a gesture of strength, as a way to put the onus for avoiding default entirely on the GOP.” 

The debt limit can be likened to a game of chicken.  Harvard Business School Professor Deepak Malhotra has a good explanation: 

“In the classic game of Chicken, two drivers on a crash course speed toward each other. The rules are simple: Whoever swerves first and avoids collision loses, and whoever is brave enough to stay the course wins. Of course, when both drivers stay the course, they collide and die. 

“Clearly, this is not a game for the faint-hearted. But bravado alone doesn't guarantee a win. Your opponent has to believe that you're gutsy enough to stay the course, or he may do the same until the very end. 

“How do you win at Chicken? One approach would be to talk tough beforehand. You might behave irrationally to suggest that you wouldn't swerve even to save your life. Once the game begins, however, your threat simply may not be credible. 

“Now consider this strategy: Once the cars are headed directly toward each other, you unscrew your steering wheel and throw it out the window, making sure that your opponent sees you do it. Foolish? So it would seem, but your threat is now entirely credible. You can't change course even if you wanted to. It's up to your opponent to decide whether to lose the game or die. The odds are in your favor.” 

Fortunately, there now seem to be some signs that the debt limit will be resolved without too much brinkmanship. Senior Republicans in the Congress know that, if the date when Treasury says it will run out of cash gets too close and no debt limit increase is in sight, Wall Street would be taking the shuttle down to Washington, DC and storming the Capitol. Republicans would be getting a lot of phone calls and visits from people they can't brush off saying that the world's financial markets and economy were being put at risk.  

Senior Republicans also know that they have more usable tools to pressure the Administration and Congressional Democrats on spending–the upcoming sequester and the need for some kind of continuing resolution to avoid a government shutdown. Prolonging a confrontation over the debt limit does not accomplish anything and hurts them politically.  

The wild card is some House Republicans. Boehner may have to violate the Hastert rule again. This unwritten, informal rule, named after former Speaker of the House Dennis Hastert, says that, when the Republicans are in the majority, their leadership should not bring to the floor for a vote a bill that does not have the support of the majority of the majority.  Boehner may have to let whatever debt limit increase mechanism Senator McConnell, the Administration, and Senate Democrats come up with to pass with a minority of the majority and Democratic votes. Boehner has already recently created two precedents for violating the Hastert rule.  He permitted the House to vote and pass the fiscal cliff deal and the Hurricane Sandy relief bill, though both passed with only a minority of the Republican conference voting in the affirmative. 

While the process may be messy and potentially nerve-wracking, the debt limit is most likely to be increased in time. There are, though, more problems that the Administration and Congress have to resolve in the coming months. The sequester is set to begin on March 1, and the current Continuing Resolution, which has substituted for year-long appropriation legislation, expires on March 27.  Negotiations in light of these looming deadlines will be difficult. A  government shutdown and severe, if ultimately temporary, cuts to some programs, including defense expenditures, are certainly possible.  None of this is a good harbinger of Washington’s ability to deal with important issues over the next two years. The disagreements are too strong, and the political climate, too virulent. 

Thursday, January 10, 2013

Deficit Scolds, James Kwak, and the Future of the American Political Landscape

The New York Times today has an article about the corporate ties of many who are connected with the well-funded and recently formed deficit-scold group, Fix the Debt.  This group casts itself as non-partisan, and I am sure many of the people involved with this group are well meaning. But even if one puts aside whatever suspicions one might have about possible motivations of some of the people involved, there is reason not to accept their framing, and that of others who are similarly minded, of the fiscal challenges facing the federal government.
The statements of some of the deficit scolds that, if we do nothing, we are going to be Greece is plain sloganeering devoid of any analysis of a small country in a larger monetary union borrowing in a currency it does not control and has no way of lowering the foreign exchange rate of that currency. The Greek predicament is interesting and important to both it and the future evolution of the European Union and the Eurozone, but its problems are more severe than and not the same as those in the U.S., nor is the Greek experience instructive for analyzing the U.S. situation.

The deficit scolds also insist that we need to make changes and we need to make them now, even if they are phased in gradually. I would contend, though, that the most urgent task of economic policy is to restore faster growth and thus lower the unemployment rate. In fact, lower unemployment is necessary in order to achieve a significant reduction in the deficit. If the Administration and the Congress could implement policies designed to get the economy growing faster and at the same time agree on sensible tax and entitlement reforms to be implemented once the economy was performing better and unemployment had come down, as well as adopting measures to improve the cost-efficiency and effectiveness of our healthcare system, that would be a good thing. But does anyone think though that the current political system can handle all these issues at once?

Republicans currently have a mantra you have surely heard: “We don't have a revenue problem; we have a spending problem.” In fact, we have choices on how to deal with our long-term fiscal problems.

In a free book (both in e-book and paperback formats), Is the U.S. Government Debt Different?, a joint project of the Law School and the Wharton Financial Center at the University of Pennsylvania, James Kwak writes: “For the decade from 2000 through 2009, total taxes in the United States averaged 26.9 percent of GDP: 17.6 percent collected by the federal government and 9.3 percent collected by other levels of government. In the OECD as a whole, total taxes over the same period averaged 34.7 percent of GDP—7.8 percentage points higher than in the United States. Increasing federal taxes by 7.8 percentage points would bring them to 25.4 percent of GDP. If federal tax revenues were to stabilize at this level, rather than at the 18.1 percent of GDP specified in my updated version of the alternative fiscal scenario, the national debt in 2035 would be only 45 percent of GDP and falling—even assuming the exact same Social Security, Medicare, and Medicaid obligations that exist today.” (p. 135)

It is of course more likely that there will be cuts to some entitlement programs as well as some increases in taxes and, one hopes, a workable approach to containing medical costs while achieving better public health results. But the point is that there is a real political battle going on with real choices to be made. Some are obfuscating this by framing the deficit issue in self-righteous terms and focusing on the growth of Medicare and Social Security spending. The real questions are what kind of country do we want to be and how big a role do we want the federal government to have. There can be legitimate and robust disagreements about this. Just don't take the word of those bearing charts that we have no real choices other than doing what they say is the right thing or bankrupting the country
Of course, there is a real question given the current dysfunction of our political system of whether sensible fiscal policy, both tax and spending, can be achieved.  James Kwak argues that those who favor no tax increases have the advantage because of the power of Grover Norquist’s no tax increase pledge, which most Republican office holders have signed. It is enforced by the threat to office holders who break the pledge of being “primaried” by opponents funded by Norquist’s group, “Americans for Tax Reform,” as well as by other well-funded groups with the same policy preference on taxes. The Democrats, Kwak notes, do not have a similar enforcement measure to preserve social programs, such as Social Security, Medicare, and Medicaid.

Nevertheless, the American political landscape is changing, as Republicans were forcefully reminded in the recent Presidential election and, sometimes, gerrymandering, which preserved a diminished majority of Republicans in the House, does not work, especially if a political party takes positions on a variety of issues that are viewed as too extreme.  Kwak concludes his chapter by writing:  “Still, there have been numerous political realignments in American history, and the specter of the national debt could provide the motivating force for another one in the next decade or two. It is the contours of the American political system that will determine whether and how the United States deals with its long-term debt problem.”

Monday, January 7, 2013

Paul Krugman, the Debt Limit, and Platinum Coins

Paul Krugman is advocating that the Administration mint a $1 trillion coin and deposit it at the Fed if necessary in order to continue to make payments and not default on the debt due to a lack of borrowing authority because of Congressional refusal to increase the debt limit in a timely manner. 
At the end of his post, Krugman mentions the 14th Amendment to the U.S. Constitution, which states in Section 4:  “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any state shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.”  The Administration says that this does not let it “ignore” the debt limit statute, but I might note that this formulation is somewhat ambiguous, since arguing that the 14th Amendment overrides the debt limit statute in an extreme situation is not the same as “ignoring” the debt limit statute.  Nevertheless, there are legal scholars, including Laurence Tribe, who argue that the 14th Amendment does not permit the Treasury to issue debt in excess of the statutory limit. Therefore, Krugman writes: “So if the 14th amendment solution — simply declaring that the debt ceiling is unconstitutional — isn’t workable, go with the coin.” 

I have no idea what the Administration’s legal analysis is of the platinum coin option.  Of course, on its face, issuing a trillion dollar coin seems ridiculous, but it would also be ridiculous for the Congress and the Administration to have reached such an impasse that the choice facing the Administration was to resort to a platinum coin or some other ridiculous gimmick or default on the debt.  And, I suppose, one could argue that the 14th Amendment justified the Administration using a gimmick such as a platinum coin to avoid default, even if the Amendment cannot be construed to allow Treasury to issue debt in excess of the debt limit. 
Of course, no one outside the Treasury, the White House, and perhaps the Justice Department (and an extremely small group at those places) can know what the Administration thinks it might do if its back was up against the wall because of the debt limit.  Any Administration wants to avoid ever being in the position of having to make the choice of using something like the platinum coin option or defaulting. Fortunately, while Treasury has used gimmicks that are now widely known as "extraordinary measures," it has never been the case that the Administration and the Treasury had to refer to the 14th Amendment, resort to a gimmick as silly as issuing a platinum coin, choose which law to break because of the impossibility of not violating some law because of the debt limit, or default on an interest or principal payment. And, as extreme as some House Republican are, I don't think it will come to that. This is a giant bluffing game, and the mention of platinum coins is part of this game, even if it is not coming from the Administration.

In a few weeks, we'll see how far each side wants to go in this game of chicken in the coming fight over increasing the debt limit. I believe Newt Gingrich is right, this is a "dead loser" for the Republicans. Market participants, whatever their ideology, will loudly warn of the dangers of defaulting, and foreign countries, such as China, will also be watching nervously. It is hard to see how, at the end of the day, the Republicans cannot let a debt limit bill pass at the last minute, whether or not they have gotten what they want from the Administration. From the Republican/deficit hawk point of view, a better political strategy would be to threaten a partial government shutdown through the use of appropriation bills and the sequestration provisions of current law. (Republicans do have to worry about the sequestration of some defense expenditures, which some worry about a lot.)

Incidentally, it keeps getting repeated that 2011 was the first time Congress ever tried using the debt limit for political purposes. E.J. Dionne recently repeated that in the Washington Post. It's not true, as a look at the record would quickly indicate.  (I have written on this briefly here and here.)

Note: I should note that, while I worked at Treasury, I was never part of the group of people who made decisions involving the debt limit nor did I ever know what the Administration was prepared to do if Congress had failed to increase the limit in time.